Cash Flow - Tips on protecting the most important asset in your business
Cash flow is the fuel of any trade or contractor business – meaning every trade professional needs to keep cash coming in to keep a business functioning properly.
Your main takeaway is - It is essential to manage your cash flow.
In simplistic terms this means ensuring that you have positive cash flow at all times, meaning that the inflow of cash into your business is greater than the ouflow from bills, expenses, staff costs etc.
Here are our top 6 tips to help you ensure your cash flow remains positive at all times.
1. Create a monthly cash flow statement.
Many account packages will have one built in, but if you don't have one ask us and we will provide one.
Essentially a cash flow statement allows you to:
- Track inbound and outbound cash within your business - both actual and projected
- Plan your business cash flow and expansion plans more efficiently
- Determine if you are going to run out of cash
- Determine what action you need to to prevent the above!
Essential stuff. Ask us for more details and we will be happy to assist.
2. Get deposits, manage payment timelines where possible.
For most tradesmen and trade professionals undertaking medium to large-scale home improvements, asking customers for a deposit is simply a standard business practice.
It allows you to purchase the required materials for the job and to survive the duration of the project.
Additionally, for larger projects, it is also accepted practice to ask for stage-payments based on agreed milestones being completed. This is where a contract becomes essential and it should map out all milestones and payment schedules as agreed by both parties.
3. Have Early payment incentives.
Managing your cash flow hinges on knowing when customers will pay and often you need to give them an incentive to hit your projected payment dates. One universal way to do this is to clearly indicate a due date on your customer invoices. This documents a line in the sand for payments and avoids any potential confusion with your customers..
You can also add a line such as 'Strictly 2% early payment discount within 7 days of invoice date' on the base of your invoice to encourage your customers to pay early. You may wonder if it is worth it, but running out of cash is a worse alternative than giving a small discount!
Additionally as a tradesman you should also outline to your customers what the consequences of paying late would be. As an example if you have a specified due date on your invoice as above, you could add a line similar to “Payments made after the (due date) may incur an additional a late payment charge of 2% of the total invoice amount."
4. Manage your supplier payments closely.
If you flip point 3 on its head, all Tradesmen should look to avail of any early payment discounts that are available as long as there is sufficient cash within the business to do so. See point 1 above on how to manage this.
However, if there is not sufficient cash to pay early, then you need to manage your cash closely and only pay a bill once due. But always be aware of maintaining a good supplier relationship - keeping suppliers on good terms by paying on-time where you can is essential as you may need their support sometime in the future!
5. Actively manage outstanding invoices.
Cash is king. Where you have provided a service as agreed, it is only fair that you get paid.
Because cash flow is critical to every Tradesmen's business, it’s crucial that you keep a close eye on your customers and their payments to you.
Customers who do not pay or pay very late are a big problem for your cash flow - and unfortunately there are many incidences of this in the trade sector. It is essential to be able to track late invoices and to automate reminders to your 'problem' customers. We can help you with this if you need it, just ask us.
Where a customer downright refuses or ignores payment reminders, you may need to refer them to a debt collection agency. Again, we can assist with this. Contact us for help.
The bottom line is that Tradesmen who's businesses have good cash flow thrive. It is important to take heed!
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