Are there times when you don’t have enough money in the bank account to pay the bills, wages or the ATO? Does this cause you to freak out about your cash flow?
There are several times during the business lifecycle when cash flow challenges will arise unless you have a sufficient buffer of funds in the bank to carry you through these times.
One circumstance is during periods of growth when you’re required to pay out costs before the higher revenue is received into your bank account. This could be the need to pay additional wages when the income from their work isn’t received until 30 or 60 days later.
Another circumstance is when your clients or customers delay paying their invoices to you. This frequently happens in the construction industry but can happen to anyone.
Let’s face it, cash flow challenges are part of doing business. It’s a struggle during those time periods but there are 3 steps you can take to minimise the impact of a shortage of money.
Here are three of the best ways to minimise your need to freak out about your cash flow:
Now, I can hear you saying, that’s easier said than done. And while that’s true, it is achievable with some focus. You see, I used to lurch from one fortnights’ payroll to the next and dreaded the first day of the month when the rent was due, let alone the quarterly BAS bills that inevitably were too big to swallow.
Over a twelve-month period, I worked hard to create a buffer and built it up to more than three months of expenses in surplus funds.
To create a buffer, have a second bank account where you stash money to cover the BAS, superannuation, and potential income tax amounts.
If your business has consistent income and expenses, you’ll have a fair idea of the amount of the quarterly BAS. You’ll also know what your superannuation liability is each quarter too. Total those two figures and divide them by 13.
The resulting number is the amount of money you need to transfer out of the main business bank account into your second bank account. If you do that each week without fail, when the BAS and superannuation are due, you’ll have the money in the bank for them.
If your income and expenses fluctuate throughout the year or are seasonal, one option is to put aside the PAYG withholding and superannuation on the same day as you pay your employees. Then for the GST component, check the activity statement report from your accounting system and use that as a basis to identify the amount needed in your second bank account to cover this component.
To put aside money to cover income tax, I suggest asking your accountant to provide you with an estimate of income tax for the year and divide that by the number of weeks you’re open for business and put that amount aside each week, and you’ll have that covered too.
In this forecast, identify when you expect your clients or customers to pay your invoices and when your bills, wages, superannuation, ATO payments are due on a week by week basis.
Then take the payments from the income receipts to see whether you’ve got more money coming in or going out during the week. Add this to the existing bank balance to see where you expect to be at the end of each week.
This will quickly identify weeks in the upcoming few months when you have a potential shortfall. Armed with that knowledge, you can either chase up your invoices for payment or look at delaying payment of expenses.
The key here is that you’re looking to the future all the time and have the ability to plan. This means there’s no need to freak out and you can minimise your stress levels too.
Consider changing the way you invoice your clients or customers and seek to get payment up-front or at the time of service.
Think about it, when you take your car to the mechanic for a service; do you get an invoice you can pay 30 or more days’ later? I suspect not. You’ll need to pay with a credit card on the day, or you won’t get to drive your car home.
Similar arrangements occur with retail shops and most medical practitioners. So, why are you giving credit and allowing your clients or customers to pay you in the future at some point when they get around to it?
Next time you freak out about insufficient funds in the bank account, consider looking for ways to create a buffer in the bank account. Create a twelve-week cash flow forecast and look at what you could do to get paid up-front.
Then when your business goes through its next growth phase, you’ll have a buffer so that you won’t need to freak out about your cash flow.
Originally published on www.smallville.com.au