Running a successful small business is no easy feat. Once you look past the enticing opportunities such as setting your own schedule or becoming your own boss, you are met with the startling reality that 60% of Australian small businesses shut their doors within the first three years of opening(1), So, what’s going wrong? Is it simply poor management, or perhaps lack of foresight and vision? While there are surely numerous factors at play, it has ultimately been reported that 82% of small business cite one main reason for going out of business: cash flow.
What Is Cash flow?
To learn how to avoid this main roadblock, it is essential that you first understand it. Cash flow is a complex concept that many small business owners make the mistake of overlooking. At its core, defining cash flow is simple: it measures the movement of money flowing in and out of your business.
While profit and cash flow are correlated, there is a difference between the two. Since cash flow only represents the balance in your bank account, your business can turn a profit but still have zero cash. If you are selling products, yet have more expenses than earned income, you will have negative cash flow.
Defining ‘accounts payable’ and ‘accounts receivable’ is also useful when expanding on this concept. Accounts payable refers to a liability account that tracks the money leaving your business (i.e. payroll, business expenses, loans etc), whereas accounts receivable is an asset account that keeps track of money coming into your business (money you receive from customers for the goods and services you provide).
To understand where this comes into play when determining cash flow, your business could turn a profit of $30,000 in one month, but only see $10,000 of that in cash flow, because the rest is pending in accounts receivables. These accounts are crucial when balancing your accounting and calculating the profitability of your business.
Forecasting Cash Flow
To secure the future and survival of your business, it is essential that you forecast your cash flow. This will equip you to handle both unexpected and planned expenses, ensuring that your spending is efficient. If you’re a seasonal business owner for instance, strong cash flow management will become even more crucial, as you’ll see an influx of cash during your open season, with little cash in the remaining offseason months of the year.
The best way to keep track of cash flow in your business is to run a cash flow report. A cash flow report is a report that shows you cash received and cash paid, illustrating your business’s cash position at the end of each month. For example, you will see what happens to your cash when a customer pays a bill, your business pays a supplier, or you hire an independent contractor.
If you wish, you can typically break down a cash flow report into three segments for best tracking: operating flow, investing flow, and financing flow. Operating flow refers to any income or spending that comes from your net income, such as buying merchandise or revenue from your products and services. Investing flow covers business investments, such as buying commercial property or equipment, which will be used repeatedly to directly increase your business’ efficiency or profitability. And thirdly, financing flow refers to transactions around dividends, debt or equity.
Investing in New Staff/Products
If you have recently started or launched a new business, you will need to invest some cash. This may include anything from purchasing new equipment, to building a website, or placing a deposit on a new office space. Don’t be alarmed if you initially see more cash output than input. However, you will ultimately need to fund these expenses while still having some capital left over for when your business opens its doors. To do so, you’ll have to carefully protect your cash flow.
To begin, consider investing some of your own money to cover your start-up costs. You may also want to explore financing options such as a business loan, line of credit, or small business grant to help with the initial costs.
Keep Track of Overdue Payments
Chasing consistent late payers can hinder your business. Forecasting your cashflow allows you to see the impact on your bottom line and give you adequate time to alert clients and the need for effective credit control and timely payment strategies
Every business will have time-sensitive revenue goals and targets, so forecasting your cash flow is essential inyou understand when and if they will reach these goals. Forecasting allows you to see the breakdown of your budgeting, by seeing the movement of cash into and out of the business. This will not only reveal whether you are landing over or under budget, but it will help you to increase the accuracy of your future budgeting.
Plan for Seasonal Trends and Cash Gaps
Seeing cash gaps allows you to put an effective payment plan in place. Plan to set aside enough cash from peak sales periods to cover your operating expenses during off-seasons or slower seasons. You may also consider setting aside an extra cash buffer to cover unexpected costs. assist.. Having an overview of your expenses and when they are due is important so create a calendar for your operating expenses and add entries of all recurring payments and their due dates.
Budgeting for tax payments
Tax payments always seem to spring up more quickly than you would expect. However, many business owners aren’t aware that you can actually pay the ATO by credit card, meaning you’ll have money available in your bank account for longer. You can hold onto your cash during the interest-free period on your credit card, without it costing you any interest so long as you pay your credit card bill on time. Read more about paying the ATO by credit card, all while earning full credit card reward points by using B2Bpay here.
Common Cash Flow Mistakes
Impulse spending, during the start-up phase, can be tricky to navigate. While it does take money to make money, not all expenses are necessary. Keep your eye on the bottom line, considering the cost-benefit of every single expense. Create a realistic budget and be sure to stick to it! Continuously calculate how any purchases will delay your breakeven point (i.e. the point when your plan for your business to earn back the cost of your initial spending).
Not getting paid quickly enough
Delayed payments, and unpaid invoices from clients can quickly kill the cashflow of a small business. Small businesses that don’t establish strict late-payment penalties and collections policies are often the most vulnerable. While it may feel risky to ask for payment from your customers at the start of a new business, it is important to remain diligent and consistent about collections. Once your clients know that you’ll be reaching out the moment a payment is late, they will be less likely to delay your payments. Good policies tend to include a given percentage late fee penalty after approximately 5 days, or work stoppage after 30 days past due (for service-based companies).
Overestimating future sales volumes
It takes a tremendous amount of confidence and positive thinking to start a small business.While this quality may be essential for a new business owner/s, it is important to maintain a heavy sense of realism when it comes to managing your cash flow.
Once your business has been operating for a few years, it’s a good idea to complete objective and continue to practice realistic forecasting based on past numbers and evidence. You can use actual past revenue data from your own business or other businesses in your industry as a baseline for predicting future sales and identifying trends. This will help you come up with some realistic projections, and consider variation over different periods (i.e. the holidays).
However, if you are still in your first few years of business, you may want to consider working with a mentor from your own industry. They will be able to help you project future sales, and even offer sales figures from past personal experience to assist you in predicting upcoming figures.
Not having enough cash on hand
No matter how well planned you are, unexpected costs are a reality of being a business owner. This shouldn’t be a make-or-break it issue, so long as you have a cushion of savings to rely on. But if your company is functioning on a zero or negative account balance, one low profit month could be devastating.
Be sure to maintain an account balance equivalent to at least two months of your operating expenses. This will ensure that you have the appropriate reserve in place, should you unexpectedly require it.
How B2Bpay Solves Cash Flow Issues
B2Bpay addresses one of the most common cash flow issues — getting paid faster! By using B2Bpay and accepting all major credit cards, your clients will be encouraged to pay you more quickly. The range of payment options also helps to avoid excuses for late payments, as B2Bpay now even accepts payments from bank account.
With a B2Bpay payment link or button included on your invoice template, making payments will be quick and simple for your client. Funds will be transferred to you by EFT or BPAY within just 3 business days. Plus, you’ll earn Qantas Points on all eligible payments you make or receive with B2Bpay – allowing you to accumulate reward points that may help reduce travel and accommodation costs for your business!
Along with these benefits, B2Bpay is a great option for your clients’ cashflow as well, as they can take advantage of their credit card’s interest free period up to 55 days. Read more on the benefits of improving cash flow with B2Bpay here.
Connect Your Accounting Software with B2Bpay
B2Bpay has the ability to easily connect it with your Xero, MYOB, or Quickbooks accounting software. Once you’ve connected your accounting software with B2Bpay, all of the payments you make and receive will be automatically recorded in one location, with no manual entry required.
Stay organised and avoid late fees by viewing all your pending invoices in B2Bpay to pay in one click. You’ll also be able to save time with automatic recording as when you pay, your software will automatically be updated and reconciled for you!
Accepting payments is just as simple. You’ll be getting paid faster by accepting credit card payments online, at no cost to you. B2Bpay will set you up with a unique, branded payment page, where customers will simply need to click the ‘Pay Now’ button on invoices to be directed to your payments page. You’ll save time, and keep close track of payments, as all your customers’ payments will be auto recorded in your accounting software.
Cash flow issues are one of the most difficult, and daunting, aspects of small business ownership. However, with careful planning and spending, you’ll be prepared for both the expected and unexpected, setting you up for success.
B2Bpay is a great no cost solution for you to ensure a positive cash flow stream by accepting card payments and getting paid faster. There are no terminal fees, merchant service fees or monthly charges. Meanwhile, you’ll be earning Qantas Points to use for business, just for getting paid.
With such great incentives, and the ease of use (at no cost), B2Bpay offers your clients a way to make immediate payments and generate their own rewards through B2Bpay while your business continues to build a well-managed and healthy cashflow.
Click HERE to become a B2Bpay Biller today and start saving time and money for your business. Let B2Bpay take the hassle away from payment chasing so you can focus on what you do best – making your customers happy and growing your business. For more information on how to become a B2Bpay Biller, speak to one of our specialists on 1300 625 647 today.
(1). According to the Australian Bureau of Statistics: http://www.abs.gov.au/