Three ways to bridge the cash gap

Peter Switzer

In my last column I wrote about the cash gap that businesses can suffer when money flows out faster than it flows in. It’s such an important topic that I thought it was worth taking the time to talk a little more about the gap and how you can get around it.

So here are three practical steps you can take to bridge the cash gap.

Collect money that is owed to you

If you need to give customers time to pay and you are sure they are reliable, then work out credit terms for them. Before you do that, run a credit check on any business to which you are extending credit.

Whatever you do, control the number of people who pay you on terms.

Credit control is crucial all the time but especially when the demands of Business Activity Statements have created more late payers.
 

'Nothing will depress a business — and its owners — faster than finding that funding is drying up as accounts receivables blow out’, says accountant Stephen Preen, a partner at HLB Mann Judd.

Preen points out that when you are not collecting what you are owed, you are effectively funding your client’s business.
 

He accepts that it’s sometimes hard to put your foot down with slow paying customers you want to keep, but you do have to bite the bullet.
 

While some smarties have tried stunts like getting a less-than-conciliatory Hell’s Angel to go debt collecting, Preen offers 12 conventional steps to getting your money back home to your business:

1. Have a set debt collection system and stick to it.
2. Follow up on slow payers.
3. Get slow payers to admit that there is a problem and secure a promise for some amount to be paid.
4. Go and see them in person and don’t leave until you get a commitment that they will pay up.
5. Using the telephone, make sure you get the commitment to pay.
6. Encourage payments to be made directly to your bank account.
7. Send 30, 60 and 90 day letters reminding them of your terms.
8. Send professional demand letters and threaten legal action.
9. Where possible, insist on payment when work is done or obtain written terms of trade, or both.
10. Discuss amounts up-front so customers know you are serious about your collection.
11. If necessary, use a professional debt collector and be prepared to go to court.
12. When dealing with debt recovery, the experts say not to get emotional. Remember the advice in The Godfather — it’s not personal, it’s business!

 

Lease rather than loan

A story that always comes to mind when leases are mentioned is the one about a close family friend, Bill, who started with a hotdog stand at Sydney’s Paddy’s Markets back in the 60s. As we all embraced local markets throughout the 70s and 80s, his business grew too.
 

By the mid-70s, he went to his bank to ask for a $60,000 loan to buy a new truck fitted out with counters, stoves, fridges and so on.
 

A new bank manager had taken over and asked for a statement of position. After doing a quick look at the numbers, the manager promptly informed Bill that he had substantial assets and, with proper management, would not have to borrow piffling amounts like $60,000!
 

He pointed out that equipment depreciates and it would be better to lease it to avoid cash flow problems. This bloke now owns a hotel worth more than $8m!
 

Leasing should produce a better bottom line and better cash flow. Remember, failure to manage cash properly is a prominent reason for business failure.
 

You can have a profitable business but still be brought to a standstill by cash flow problems. Treat cash flow as a priority and work with your accountant and your bank to manage this incredibly important area of running your business.
 

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More advice

• Read more practical advice on working the numbers.

 

• Important information
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