How does your cash flow forecast look for the festive season?
It’s November but before you know it, Christmas will be upon us.
For some of us, this is our busiest time of year. For others, it can be a quiet time where suppliers and clients are on leave an enjoying the warm, sunny weather with family and friends. In both scenarios, it is important to forecast your cash flow over the summer period, specifically, December through to February. Here’s why…
If you employ staff, you are likely to be paying out annual leave. You might have a Christmas function and you may even close your business for a time. These all create pressure on cash flow. It is often a time when businesses spend more but earn less.
There are several online tools that can help with forecasting cash flow. An example is this cash flow forecast template from Xero. Templates like this help to predict the amount of money that will be in your bank account in the future.
It’s unlikely that many of your clients will undertake a forecast like this and so they might find themselves in a position where the amount of money in their bank account is less than what they anticipated. This can then create a negative cash flow spiral, which is difficult to counteract and may affect you…
Ask yourself these questions:
- If one of your customers didn’t pay you during this period, how would it impact your business, your Christmas, and your start to 2024?
- Do you have anyone that hasn’t paid you for work you invoiced in September?
- Are you able to pay all your suppliers during this time?
If you are concerned with your answers to these questions, we can help. But it is important to take action now to avoid the pain of inaction later.
Here’s how you can improve your cash flow this summer:
- Be prompt in escalating any overdue invoices to us for resolution. This is quick and easy to do online. There is no need to pre-pay. The sooner you load a debt, the more likely you are to have the money in your bank account this summer. We operate with a resolution-based approach to help keep your customer relationships intact.
- Have comprehensive terms and conditions of trade in place. Correctly worded terms and conditions help to ensure that you get paid on time.
- Register your interests on the PPSR to protect your business in the event of liquidation. With liquidations on the rise, it is important to protect your position. With correctly worded terms and conditions you can register your interests on the Government register.
The cost of inaction
Here is an example that shows the cost of inaction. (We have left GST out to keep this simple.)
Let’s say you have a hypothetical $1,000 unpaid invoice and a 20% profit margin. That means that you were set to make $200 profit on that job but instead it has cost you $800.
All things being equal, you will need to invoice an additional $4,000 to break-even on this unpaid job – effectively all 5 jobs (assuming all are $1,000) have been done for free – this is a break-even situation.
The alternative is to load the debt for resolution. The cost for doing so is $60. Assuming we collect the debt in full you will be charged commission on the $1,000 we recover. Our commission charge on this is $250. Therefore, assuming that we are successful, to get your $1,000 back you have spent $310. The job has still been a cost to you but instead of it taking 5 jobs to break even, it now only takes 1.5 jobs meaning that the remaining 3.5 jobs are back your 20% profit margin.
So instead of making $0 profit over 5 jobs due to inaction, you have made $690 out of 5 jobs – a 13.8% profit margin and a huge improvement on inaction.
Remember, GST has been left out of the above example to keep things simple. Furthermore, if you have terms and conditions of trade in place that allow you to pass on debt collection costs, our service (including the load fee) can be cost neutral meaning you can get back to your 20% profit margin.