To survive, businesses need to make profit. But, making profit doesn’t guarantee positive cash flow. One of the biggest mistakes that people make when they’re starting out in business is not keeping proper accounting records. A spreadsheet recording your income and expenses is not sufficient.
With a proper accounting system you have information on exactly how much your clients or customers owe you and how much you owe your suppliers, contractors and the ATO. It is only when you have these numbers readily available that you have the information to improve both your profit and your cash flow by 25% or more.
The key is that the accounting system must be kept up-to-date at a minimum of a weekly basis, preferably daily. When your accounts are reconciled on a daily basis you have accurate listings of your outstanding invoices and you know whom you will need to follow up to get payments in your bank account.
When the reconciliations in the accounting system are done weekly or later, the information won’t be as accurate and you run the risk of ringing up a client or customer seeking payment only to have them tell you that they paid you a couple of days ago.
This is bad for your business for these five reasons:
- You’ve wasted your time on a phone call that wasn’t necessary
- You’ve then wasted your time to check that the money has been received
- And then you’ve wasted your time phoning your client or customer back a second time to acknowledge receipt of the payment and to apologise for calling in the first place
- You’ve wasted the time of your client or customer
- Potentially, you’ve changed the dynamics of your relationship with that client or customer. At the very least you’ve flagged that you’re accounting system isn’t in good shape
Having up-to-date accounting information ensures that you focus on chasing up those clients or customers who need to be chased up. You can implement procedures for following up via a system of emails, phone calls and snail mail. By establishing a routine for chasing up your slow payers, you will find that money will come into your bank account more quickly.
It’s those people who chase for money relentlessly that get paid first. Whether you’re dealing with the accounts payable person or the business owner, neither of likes having to deal with the same person over and over again chasing for money. When this happens, they will do everything they can to get you paid, to stop you from “harassing” them. If you have money owing to you, you need to be the person harassing until you get paid.
Remember when you tried to get an account with one of your suppliers? They asked you to fill in a credit application form and chances are, they have a limit on the amount you can put on the account when they had done their credit checks on you.
In business, most don’t do the same for those seeking credit from them. Why? Perhaps because you don’t know how, more likely it’s due to lack of time and the general view that any new client or customer is good for business; and heaven forbid that we ask them to fill out a credit application form. The risk you take is selling to a client or customer who is never going to pay you on time, who you will always have to chase for money and perhaps one day, who just won’t pay at all when their business fails.
In summary, make sure you have accurate and up-to-date accounting records and put systems in place to regularly chase up outstanding invoices. Also, remember that you’re not a bank; the money people owe you is your money and it belongs in your bank account. By implementing these simple strategies, you will increase your cash flow into your bank account by 25% or more.
