How important is collecting receivables for cash flow?

Generating cash flow hinges on receivables and vendors paying their bills on time.

Small businesses are the lifeblood of the Australian economy. According to data from the Australian Government, small businesses employ 40% of the country's citizens, pay roughly 12% of company tax revenue and are responsible for approximately one-third of Australia's gross domestic product.

However, none of this would be possible without cash flow, meaning the money available that pays for the costs of running a business. While there's no doubt that business owners can run into cash flow troubles from time to time due to unexpected sales or performance issues that compromise the amount of money coming in or going out, your business has to be in positive territory more often than not. How do you go about this? By prioritising receivables and ensuring that those who owe you money for products delivered or services rendered pay you on time.

Cash flow concerns are quite common

Every business – no matter how big or small, start-up or seasoned – encounters challenges. Cash flow is chief among them, numerous polls and reports have shown. Indeed, in the aforementioned report put together by the Australian Small Business Family Enterprise Ombudsman, positive cash flow was cited as among the top three stress points for business operators who are female, along with attracting new customers and profitability.

And in a separate study done by Wakefield Research, small-business owners have lost out on no less than $10,000 in potential earnings after nixing projects caused by cash flow woes. Unfortunately, these aren't isolated incidents. To the contrary, for many small-to-medium enterprises – 63% – cash flow struggles occur more than once a year.

What's causing these currency dilemmas? More often than not, receivables that have yet to be paid. Wakefield Research found that close to one-third of small-business owners had at least $20,000 in past due receivables.

It's pretty simple: If cash isn't coming in, services or product isn't going out, not to mention problems affecting payroll, inventory, utilities and a host of other costs associated with business management.

Fortunately, there are a variety of strategies you can adopt or implement that can re-energise cash flow. Here are a few of them:

Get on the same page

All too often, breakdowns in communication are the cause of cash flow troubles. In short, customers or vendors may be unclear about when payment is due and what's owed. They may also be unaware of the deadline your operating on to ensure business as usual. The best way to avoid these misunderstandings is to be proactive and clearly state when bills are due. You may want to do this right when you first form a partnership with a vendor so everyone is clear about expectations moving forward.

Make past-due receivables a first-and-foremost priority

It's rarely comfortable to request payment, especially when a vendor is brand new and you want to come across as understanding and appreciative of their business. However, respect goes both ways and by allowing past-due receivables to go unaddressed you could risk overdue payments in the future. The best way to avoid this is to nip it in the bud early on. In other words, if a receivable is not paid the day it's due, contact them within 24 hours as to why. You may be able to work out a payment arrangement so subsequent issues – if there are any – can be quickly resolved.

Offer incentives for paying early

Vendors who settle up early help you avoid cash flow issues later on. You may want to offer some kind of incentive that can encourage them to pay their bill before it's due. What those terms are, such as a percentage discount, is up to you.

At WMC Accounting, we provide cash management and forecasting services that can make cash flow the least of your concerns. Please contact us to learn more.

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