Cashflow can make or break a business and it’s something we as business owners don’t do very well.
So what is cashflow exactly?
Quite simply, cashflow is the movement of money both in and out of your business over a certain period of time. So if your cash is flowing out of your business and not back in at roughly the same rate, very quickly your business will run out of cash to pay it’s bills and you’ll be out of business.
So how can we manage our cashflow?
One of the first things we do here at Tilda Virtual Services with a new bookkeeping client is to take a look at the Aged Receivables report. We try to determine the accuracy of the report, the total amount outstanding and the periods in which the amounts fall. This report alone will tell us if the business is controlling it’s aged receivables effectively to remain solvent.
To manage your cashflow you will need to create an Aged Receivables Procedure. You need this procedure to make sure the relevant people within your business know when and how to follow up outstanding invoices. You need it to know how you will manage your cashflow.
Think about how you supply your product or service. Is it project based or ongoing? Do you have repeat business or are your clients/customers purchasing only the once? These questions will assist you in deciding on what trading terms suit your business. For example: let’s say you are a website designer who works with clients once only on a project basis. Your trading terms may very well be 50% deposit and 50% on completion. Or let’s say you are a Virtual Assistant who has some project based clients but the rest are ongoing repeat projects. You may decide to invoice once a week/fortnight or monthly depending on when your own bills and liabilities are due and that they are due 7 days from date of invoice. Once you have determined what your trading terms are, you are ready to move onto the next step in creating your AR Procedure.
Now it’s time to to think about how long it is between the supply of product/services to the time you get paid. If you supply a product/service on the 1st the month but invoice monthly on the 31st with trading terms of 30 days from date of invoice, effectively you are waiting 60 days+ to get paid. Does that seem right to you to have to wait that long to get paid? Can you see how if you changed how often you invoice and reduce your trading terms, you’ll get paid quicker?
You also need to think about when you’ll start to follow up overdue invoices. Do you call them on day 8 of your trading terms to find out when you’ll be paid? Do you send a reminder letter? Do you send a statement? Once you have decided on the sequence of events, write it in your Aged Receivables Procedure. Don’t forget to create the templates, phone scripts and record keeping forms to add with the procedure. They are all important elements of your new procedure.
Once you have done all the hard work of figuring out when you’ll invoice, how long until the invoice is due, when you follow up overdue invoices then start to actually do it, you should start to see an immediate difference to your bank balance. The idea here is to make sure your invoices are getting paid regularly and on time to make sure you can pay your own suppliers.
If you need assistance in creating your Aged Receivables Procedure, contact me today. I have templates for sale that you can use and I can coach you through the process. Don’t wait until your suppliers are hounding you for money before you start managing your cashflow. Start today and see the huge difference it makes to your business.
