As a Tradie, you’ll no doubt already know the stresses of managing cash flow. Even when business is going great guns, you may be anxiously waiting for invoices to be paid so you can pay staff, purchase tools and keep the van running. Fortunately, there are ways in which you can ease the burden. Let’s take a look at five top tips for managing your cash flow effectively.
For all small businesses, there’s often a minimal amount of capital available to fall back on when times suddenly get tough. Most of us are striving for positive cash flow at all times (unless you’re a start-up deliberately running at a loss or have the ability to fall back on external capital).
Interestingly, a recent study found that for most of us in the Construction industry, there tends to be seasonal fluctuations. In January, for example, cash flow tends to take a large dip, taking until March to recover. However, it seems like a lot of us are doing well before Christmas. This is probably due to a combination of factors; the Christmas shutdown and people wanting jobs done and paid for before then, whereas for the rest of the year we might find ourselves chasing payments relentlessly and waiting longer than expected to get paid.
If you’re able to analyse your own business fluctuations, it’s much easier to manage when times get tough temporarily. Preparing cash flow statements, monitoring margins and analysing your overhead expenditure can all assist in planning ahead.
Building a cash reserve might mean you take a little less out of the business in the short term, put will put your business on the path to success in the long run!
To be able to manage your cash flow effectively, you need to know what’s going on, so make sure you’re on top of your finances (or someone else is!). If your accounting information is updated regularly, you’ll see what’s happening at a glance.
If you’ve followed the second step, you’re probably on to a winner with this one. By having a reliable accountant in place, you’ll be assured that everything’s as it should be, and they’ll be able to help you manage your cash flow accordingly. Keeping your finances simple also means you’ll be able to understand other important business metrics like your operating margins, profitability and inventory.
The key is to be direct and fair. If you’ve got a good accounting system in place, you’ll be automating your invoicing processes and taking the personal element out of it. If some of those invoices are looking as though they’ll never get paid, there are ways in which you can’t take more formal action, and you shouldn’t be afraid to do so if necessary. But, try to avoid getting to that part where you can by sending invoices in a timely manner and chasing payment politely.
There’s a common theme here of keeping things plain and simple, and this also applies to keeping your personal and business finances separate. Mixing the two can leave you uncertain about your true financial cash flow position. Keeping them separate means that you’ll know exactly how much cash your company is generating, and when it’s peaks and troughs are.