Mind the gap

Peter Switzer

There's one thing for certain — and anyone in business knows it. If you don't understand the impact of a cash flow gap (the time between cash going out and cash coming in) you can turn a profitable job or project into a financial mess.

Nearly every business experiences this: the money flows out before it starts to flow in.

Make it easy

What most people don't know is how to find a solution to this pressing problem. One way to reduce the cash flow gap is to give your customers easier ways to pay you on time.

Let's get real here. If a customer's only option is to write a cheque, address an envelope, find a stamp and post the letter, you really are putting a lot of obstacles in the way of getting the money you so badly want. Offer customers a range of payment options. These include BPAY and credit card.
 

Electronic payment methods can streamline your banking. Giving your customers access to these payment methods means payments can be credited directly to your bank account. In many cases these payments will be credited as cleared funds, which enhances your cash flow and removes the uncertainty of whether or not a cheque payment will be honoured.

Why do cash gaps occur?

Well there are lots of reasons, but try these for starters:

• You buy stock before you sell any goods.
• If you're a manufacturer, you pay many of the costs of manufacturing a product before you can sell it.
• If you're a one-man band, you still need to pay the costs of your own labour (that is, pay yourself a wage) until you complete a job and get payment.
• If you have employees, then they won't stay with you for long if you don't have the money to pay them!

What else can you do?

A sensible business does cash flow forecasts which make it easy to see when expenses occur and when income can be expected. This helps you to plan your need for cash.

The next thing to do is to keep updating your cash flow forecast to see whether you need to access additional cash through sources such as a line of credit or a bank overdraft.

When you do your cash flow forecast include:

• Rent.
• Gas, electricity and phone.
• Insurance.
• Office consumables (such as stationery, photocopying and postage costs).
• Couriers.
• Advertising and printing.
• Tax office payments (BAS, GST and so on), when they fall due.
• Superannuation.
• Credit card payments.

Control the flow

Learning to control factors that affect your cash flow is the first step in reducing the potential cash shortage.

When developing a cash flow management strategy for your business, you need to take into account how your customers pay you. For example, are you paid in advance, paid when the sale occurs, or do you offer credit?

If you're lucky enough to receive payment in advance, your cash flow gap should be minimal. However, if you regularly invoice for goods or services after you have provided them, you'll have a greater cash flow gap.

The longer your customers take to pay you, the greater the impact on your cash flow. It’s as simple as that.
 

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More advice

• Read more practical advice on working the numbers.

 

• Important information
  As this advice has been prepared without considering your objectives, financial situation or needs, you should, before acting on the advice, consider its appropriateness to your circumstances. All products mentioned on this web page are issued by the Commonwealth Bank of Australia; view our Financial Services Guide (PDF 59kb).