Julian Smith: Keeping a close eye on cashflow will bring rewards

Trim costs before dropping prices, advises Julian Smith. Photo / Kenny Rodger

Money is one of those subjects that people often prefer to sidestep. But the reality is that cashflow is the mainstay of any business and can be the difference between a rocky road and smooth sailing in the year ahead.

In the November MYOB Business Monitor, 62 per cent of Kiwi business owners expected cashflow to be a pressure point in the next 12 months.

So what can you do to manage your cashflow more effectively? Here are five tips to get you started:

ONE

Don't automatically drop prices - look at how you can trim costs, while still delivering quality goods and service, and how to introduce greater efficiencies. This can be a good team development exercise and an effective way of getting staff on board.

TWO

Issue sales invoices as soon as goods or services have been provided, with incentives for prompt payment. Modify your terms of trade to include late fees for overdue accounts, including debt collection costs, and make sure this is clearly communicated to your customers.

THREE

Remember credit is a privilege you extend, not a right, and be careful who you extend credit to. Can you ask for a deposit?

It's not uncommon to pay 50 per cent up front for certain services. Do monitor your accounts receivable and chase any debts from a month overdue. It is important to follow up on these customers as soon as possible to arrange payment options to ensure you do get paid.

FOUR

Review your inventory and your product categories - many businesses carry surplus stock that does not match the economic environment or the needs of their customers, and instead just ties up cash. Get to know your customers and their requirements, which can have the additional benefit of increasing sales.

FIVE

Ensure accurate, timely financial information is available at your fingertips to keep a close eye on the reality of your business and talk to your accountant about how to track your cashflow effectively, such as with the use of a rolling cashflow forecast. Interestingly, in the survey only 12 per cent of Kiwi business owners admitted that they don't track cashflow as well as they should, and yet more than 40 per cent said they referred only to their bank statements to monitor their cashflow. Maybe there is room for improvement after all?

Whether your business is feeling the effects of the downturn and slow recovery, or you are riding high on a new market opportunity, focusing on being able to effectively circulate your working capital will pay dividends.

* Julian Smith is general manager of MYOB.