Poor cash flow a huge reason why 60% of small- to medium-sized businesses in Australia cease operations within their first few years.
It’s a serious problem that you'll want to avoid at all costs. If your cash flow isn't up to scratch, you won't have the money you need for your immediate costs, including operation costs. Poor cash flow will kill your business faster than your competition ever could.
What causes poor cash flow?
There are several reasons for poor cash flow. Over-investment, high overhead expenses, too much stock, or poor financial planning are some of the causes, but most of the time, it’s because of not getting paid on time. In other words, late payments.
MYOB creates an annual SME Snapshot, and past reports have shown that accommodating late payments creates a bad cash flow cycle inside a business that can be fatal. CEO Tim Reed has commented on the pain that late payments cause.
"It’s unfair that many small business owners are being subjected to late payments on top of the day to day challenges of running their own business," Reed said. "The financial health of Australia’s small business owners should be a top priority and the research indicates this also has a direct impact on their own personal well being."
Some results from MYOB's past SME snapshots have shown:
- 77% or more than three-quarters of Australian small- to medium-sized businesses said they had been negatively impacted by customers not paying on time
- 52% said delayed payments gave them heightened stress and anxiety levels
- 35% reported their personal finances were affected
- 32% said not getting paid on time had impacted their ability to cover operational expenses
Late payments are a growing issue
Late payments are a growing issue right now in Australia. In fact, it has been said to be the “silent killer” of startup businesses.
To get in to into a positive cash flow position, you must have a larger amount of money coming than going out. But, if your customers don’t pay you on time, your cash outflow will slowly become bigger than your cash inflow.
This results in you being incapable of paying your wages, rent, and the other things you need for your day-to-day operations. Unfortunately, many business owners have to use personal money or the money reserved for future business expansion just to cover the shortfall.
And not only that - the inability to pay all your outgoings may also lead to a domino-effect of cascading problems.
First, it will be difficult for you to fulfill all your orders. Since you don’t have the money to purchase raw ingredients, you are less likely to deliver your customers’ orders on time. Bear in mind that your customers have their own sets of customers to serve, too, and they want their orders to be shipped to them sooner not later. If you can’t deliver, that may affect your relationship with them and might force them to leave you and switch to a different, more reliable supplier.
Apart from that, lack of cash on hand also impacts your relationship with your staff. One of the effects of late payments and poor cash flow is the inability to pay your employees’ salaries on time. This is extremely stressful - for you and for them. Your staff might leave and because you're not paying them, they won't give you a notice period.
Additionally, delays in payments make it difficult for you to prepare an accurate cash flow forecast. How can you plan an expense or an outgoing payment when you’re not even sure when will you receive your next incoming payment? Cash flow forecasting is important and is something you shouldn’t skip doing as it helps you make all the important decisions you need.
As you can see, late payments result in some serious cash flow problems, prompting the Australian government to conduct an annual Pay On-Time Survey.
The prompt payment protocol
Australia has a late payment problem, and in the past, it's taken large B2B businesses 50 days to pay their staff.
To combat this behaviour, the Federal Government proposed a national Prompt Payment Protocol.
The voluntary protocol targets late payers and will encourage them to commit to paying on time. There are five principles of this protocol:
- PAY ON TIME: Business suppliers must be paid on time within the agreed payment terms. Basically, the federal government wants businesses to receive full payment within 30 days.
- COMMUNICATE EARLY: Come up with a clear payment terms contract and give clear guidance on procedures. If B2B companies won’t be able to pay their invoices within the agreed terms, they must provide a good reason.
- ENCOURAGE GOOD RELATIONSHIPS: Encourage other businesses to apply the prompt payment protocol in their own supply chains.
- ADOPT A COMPLAINT RESOLUTION PROCESS: Have a process for resolving complaints and disputes, and respond to these complaints as quickly as possible.
- IDENTIFY YOURSELF AS A PROMPT PAYMENT LEADER: Be committed as well to paying businesses on time.
How to prevent late payments
While the local government is taking steps to solve late payments, and therefore improve cash flow, there are certain steps you can take to solve the problem.
- Provide different payment methods
Your customers are busy which is the main reason why they don’t always have the time to settle their invoices promptly. However, another possible reason they don’t pay you on time is they don’t see your payment options as flexible. Perhaps you’re only accepting cash or bank deposit/transfer, which they might not find convenient.
It's important to offer different payment methods to ensure your customers can pay however suits them. Some of the methods you could provide are Cash on Delivery (C.O.D), mobile and online payments, or payments through all major credit cards and debit cards.
- Start accepting card and direct debit payments
Card payments are one of the most convenient payment methods for most B2B customers. As a matter of fact, these customers are more likely to do business with a supplier that allows them to use cards for transactions.
Direct debit payment is another option busy customers prefer. This method lets you charge your customers automatically so you never have to chase late payments again. It’s a bit complicated and time-consuming to set up so consider using an online payment platform to process direct debit payments for you.
- Manage your invoices
As much as possible, automate. Most of the time, people are happy to pay on time, but delays in payments happen because your customers haven’t received their invoices yet, or you've missed their scheduled payment days. And generally, the sooner you send your invoice, the sooner you’ll get paid. More than that, when you automate, admin and human errors will reduce dramatically.
The key to automating invoices is through tech, such as accounting platforms like Xero, or order management systems like Ordermentum. In this way you can automatically generate invoices and send them to your customers. Other online tools can even notify you who hasn’t paid so you can chase them immediately instead of just waiting for them to place their payments.
So there you have it: several ways to increase your cash flow, and get rid of the number one reason for poor cash flow: late payments. Get rid of payment delays by automating your invoice process and providing multiple payment methods - including card and direct debit payments - to your customers. This way, not only will you improve your cash flow, you'll also secure the future of your business.
Our insights team is made up of passionate writers, researchers, chefs, baristas, web developers, tech gurus, our Founders, and even an accountant. We keep a pulse on the Food & Beverage industry to bring you insights and research to help our industry trade smarter.