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SME cash flow guide: how to get paid and avoid a crisis

by OnDeck Australia,   Apr 15, 2019


It’s the ever-present irony of SME cash flow; you have creditors on your back about paying on time yet trying to get your invoices paid to you on time is like drawing blood from a stone. Sound familiar?


You’re not alone.


Almost every small to medium business owner knows cash flow can be challenging to say the least. Some of the most profitable SME businesses still fail because a cash flow crisis has come out of the blue and they weren’t prepared for the fall out. Why? Because profit alone doesn’t safeguard a business for when clients don’t pay their invoices on time or unexpected expenses arise.


While there is no foolproof method to 100% ensure positive cash flow all the time, there are a few principals that can help you create good habits and minimise the risk of a cash flow crisis bringing you undone.


Practice good accounting hygiene

Start bookkeeping.


It may sound tedious, and plenty of people not only hate the thought of bookkeeping but are intimidated by both the time consumption and mathematics of the task. But regardless of how time poor or numerically adverse you are, creating a healthy bookkeeping process will pay off tenfold in the long run.


Investing in reliable accounting software such as MYOB is a great way to streamline your bookkeeping and keep all of your accounts payable and receivable in one place. It can also help you generate professional invoices quickly, making it easier to keep your invoicing up to date. By incorporating reliable accounting software into your admin toolbox, you’ll be better placed to create some healthy bookkeeping routines. This includes non-negotiable regular invoicing.


Depending on the size of your business, invoicing daily, weekly or fortnightly are the best options. Yes, the admin time might be hard to carve out of your schedule, but by invoicing consistently, you create regular incoming payments and help minimise both the size and duration of a potential cash flow crisis. Cash flow issues commonly arise when you ignore your admin then invoice in bulk (often already approaching or in negative cash flow). Sure, you might have a large sum of money to look forward to – eventually – but in the short term you have no cash incoming to deal with your payables. Regular invoicing is essentially like paying your business a weekly, fortnightly or monthly salary.


The other major benefit to committing to an invoicing/bookkeeping routine is creating an ongoing overview of your finances; what payments are coming up and what invoices are due to come in. Ensure you send a friendly reminder when you notice an invoice is overdue – many software packages will have this as an automated option.


Make a point of prioritising which expenses must always be covered, and which payments can be avoided or delayed if necessary. With this clarity, you can make informed calls on what capital you can or can’t invest in other areas of the business.


Get regular financial check-ups

Within your bookkeeping routine, build in a regular check in with a financial advisor, accountant or professional bookkeeper who can help steer you in the right direction or flag any issues you might have overlooked. Yes, it’s tempting to leave the financial appointments until tax time but investing in even one mid-year check up can go a long way to preventing avoidable and expensive cash flow issues and improving your financial health.


Cultivate positive relationships with financial backers

Ideally, you won’t have to call on them often, but by building positive relationships with financial backers you can set yourself up for if and when you might need to borrow at short notice.


Understand & set payment terms

It’s essential you not only understand the payment terms of your suppliers but also create strict payment terms for your customers. Many businesses choose to offer a small discount or other rewards for invoices paid on time and incorporate a late fee for late payment into contracts. These terms can and should be incorporated into your contracts and communicated as early as possible with your clients and customers.


A high level of transparency and communication can help minimise clients claiming ignorance and refusing to pay overdue fees. On the flip side, make sure you know the payment details of your expenses, so you can also take advantage of any payment discounts, and avoid any late fees.


Set up payment schedules

If you’re working on a project that will run for an extended length of time or require significant resources, negotiate a deposit up front and/or staggered payments in your contract to ensure you have cash coming in to cover project expenses.


Avoid extending credit

When you’re an SME, it’s par for the course that you develop strong relationships with your suppliers and clients. And it’s almost inevitable that at some point you will either be offered credit or be asked for a credit line to be extended.


While it’s not a clear cut rule, and there are always exceptions, it’s generally not a good idea to extend credit. If you extend credit while you have positive cash flow, then your client suffers cash flow issues and can’t pay – the cash flow crisis is transferred to you. If you’re not sure, get some advice from a trusted accountant, business mentor or financial advisor before considering credit lines to ensure you’re not creating unnecessary risk.


If you’re in or approaching a cash-flow crisis

Delay paying your bills until the due date keeping capital in the bank – but don’t be late on your payments. This only perpetuates the cash flow crisis cycle and risks both attracting overdue fees (making your situation that little bit worse) and damaging your credit score. If you need to check your business’s credit score or didn’t know you had one, click here to learn more.


If you have put the above principles into action, you’ll know all of the payment options available, your upcoming payables, and a prioritised list of expenses. Contact your suppliers as early as possible to negotiate an extension or payment options, and either cut out low priority expenses all together or shelve them for when you are more financially secure.


Borrow early. If you have done all of the above, you will be well placed to foresee any significant issues and have a sound relationship with a lender. Be proactive and borrow responsibly to inject money where it is most required to increase your capacity or resourcing before you’re too deep in the red.

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