Reduce your debtor days and improve cashflow

Managing the gap between the receiving money into your business and paying money out of your business is vital for sustaining viability.

Debtor days is the average number of days taken for a business to receive payment for goods or services. Keeping track of the average number of days for a business to receive payment is important in understanding the cashflow gap you might experience and the impact on cashflow planning and budgets.

How to calculate debtor days

(Year-end receivables amount ÷ annual sales) x 365 days = average debtor days.

Here's an example: An IT consultant has in her terms and conditions that payment is due 21 days after invoice date. But she is interested to know what the actual average payment time is.

Trade debtors at 30 June 2019 = $35,000

Annual sales for 2019 = $478,000

(35,000 ÷ 478,000) x 365 = 26.7 days

With this information, she can either alter her cashflow planning according to the actual time-frame or take steps to reduce the average number of debtor days.

Here are ten things you can do to reduce the payment times?

1. Update your payment terms

Make sure the terms are clear on every invoice issued. Don’t forget to include bank details on the invoice!

2. Regular admin

Schedule a regular time for your own administration and get your invoices out promptly.

3. Send to the right person

When you send invoices, make sure you address the email personally to your contact. Send the invoice to multiple addresses if possible, for example, your contact and the accounts department.

4. Use technology to your advantage

Use automated invoice reminders to notify customers when an invoice is about to be due and then when it is overdue. Do not wait to send notifications manually, let the software do it as soon as the invoice is a day overdue.

5. Make it easy for your customers

List the payment terms, for example, due in 14 days, as well as the actual due date.

6. Provide incentives for early payment 

For example, a 5% discount if paid within five days.

7. Offer several payment methods for clients

Make it easy to pay by adding an online option such as credit card or PayPal.

8. Offer instalment payment plans over a mutually agreed period. 

This allows you to plan for part payments, rather than being inconvenienced by the whole invoice being paid late.

9. Do not offer unlimited credit to customers

Make sure your terms and conditions include the right to refuse further supply if invoices are outstanding. Request part or full payment before supplying more goods or services.

10. Talk to your suppliers

Maintain good relationships and clear communications so they are more likely to help you if you need an extension on your bills. If possible, renegotiate supplier terms that suit your business cashflow.

During tough times it can be difficult to get paid on time. Use low activity phases in your business to update your terms and conditions, implement alternative payment options, think about ways of making it easy for customers to pay you and clarify information on your website.

Talk to us about adding payment options, updating your software and improving business systems to assist in reducing the number of debtor days to improve your cashflow.

We can also look at average debtor days of your business compared to industry averages and discuss ways of managing cashflow during difficult periods.

6 secrets to getting prompt payment

If you’re struggling with late payments, and about half of small businesses are, here are some simple tips to try.

Invoice without delay

Your customer can't pay until you've invoiced them, so make sure you send you bill promptly. Customers are also more open to paying when they've just recieved the goods or services that you delivered. Cash in the goodwill, there's no reason to delay.

Include all the information

Make sure you invoice has all the right information, including a description of the work or product, the date it was ddelivered, and any customer requirements such as a purchase order number. Some customers have very specific requirements so ask what they need to see on the invoice. Make the due date clear too.

Ask for prompt payment

Customers used to get weeks to pay invoices, but that's changing. More than a third of businesses now request payment within a week. Consider doing the same. Starting off at seven days will help set an expectation of prompt payment. 

Be easy to pay

Customers will pay faster if they can use their prefferemd method to hand over the money. Consider whether you can offer them a variety of options, like a credit card or PayPal.

Chase payments

Your job's not done when the invoice goes out the door. You'll need to follow up with the customer to make sure it's being processed. If the invoice goes past due, it's time to make a phone call.

Talk to us about your invoicing system, we can help you get paid faster.

4 Tips to help your debtor management

It’s not easy to request payment right now, but it is important to keep cash flowing into your business so you can cover expenses and meet your obligations to others.

As with all business dealings right now, a little empathy and a lot of open communication can go a long way.

The following tips might be useful to keep in mind when you are asking for payment.

Communication

Connecting with your customers is important. Try to make it personal to their situation rather than a one-size-fits-all email.

Connecting on a more personal level shows you value them and are conscious of the impacts that the current situation may be having on them. The empathy you show now will also be remembered when business returns to normal.

And, be proactive . Early communication will help you stay on top of cash flow and will also alert you, if you need to account for late payments.

Add value

Use your expertise to give something back. Surprise and delight your customers by offering something over and above your usual services.

It could be as simple letting customers know you want to help and being open to requests, offering a one-off discount or an offer just to chat one to one.

Offer flexible payment options

For customers who can’t pay in full, consider breaking invoices into multiple payments with payment terms moved to a longer timeframe.

Set up a credit card facility to give customers other options for payment. After all, the easier you can make it for them to pay you, the quicker you will get paid.

If you don’t have payment services set up in your Xero account, we can help you do this.

Offering a discount for early payment might provide the incentive for customers who can settle, to pay your invoice before others.

Set up debtor management apps

Debtor management apps allow you to automatically send payment reminders, provide cashflow forecasting, automate and tailor debtor communications, and more.

Dedicated debtor management tools help you to collect your debtors faster.

Keeping cash flow going is vital for your business so the earlier you can communicate with customers the better.

Talk to us about ways to improve your debtor management.

Inventory management best practices for retailers

Inventory management is incredibly important in retail and yet studies reveal that 43% of small businesses either don’t track inventory at all, or do it manually. Proper inventory management can be the difference between a lost sale and a lifelong customer.

Here are some quick tips on how you can stay on top of stock control:

Understand the relationship between sales and inventory

Look at inventory and sales data together so you can see the relationship between the two.

For example, if you pull your sales results and see that dresses are 20% of your sales, and jumpsuits have only generated 4%, the instant reaction is to buy more dresses.

However, if you simultaneously look at your inventory results, you may see that while dresses generated 20% of sales, they represented 40% of your inventory, while jumpsuits generated 4% of sales but on 1% of your inventory.

By considering the relationship of sales to inventory, you might discover you are over-inventoried in one item, and missing opportunities to sell another.

Manage residual inventory to control costs and preserve profit

Residual inventory is what remains at the end of one selling season and is carried into the next season. A few examples include wool apparel that is on sale in the spring season or outdoor furniture sets that are marked down after the summer season.

An effective way to manage this is to create season codes with style numbers when you enter items into your inventory management system. This can make analysing sales and inventory by season a significantly easier task.

Equip your business with the right inventory management tools

From choosing the right inventory management software to finding a POS solution that fits your business, it’s essential to implement tools.

The right ones will integrate together to streamline and automate processes, making inventory management more accurate and efficient.

In a competitive market, knowledge is key to business success.

We can help you understand and integrate inventory management apps into your retail business. Get in touch to discuss how.

How to create a cash flow forecast for your business

A cash flow forecast is an important tool for business planning. And right now, understanding the cash coming in and going out of your business is vital.

A cash flow forecast will show you how long your business can continue to survive on current sales levels, by showing you how much money you’ll have in the bank at the end of a period.

It will give you an understanding of what the revenue drivers are in your business, and give you visibility of your expenses and the things you can control. Having this information in a forecast will also allow you to plan for different scenarios, work out your priorities and understand the outcomes of different options such as diversification.

A cash flow plan can give you a proactive tool to deal with uncertainty. If you are seeking funding in the form of a loan, applying for business support or just establishing your long term survival, you'll need a cash flow plan.

What information do you need?

We can help you to create a plan for your business. The plan is only as good as the data you have. So here’s what you’ll need to get started:

Understanding where your cash is coming from

Start with revenue from sales - break your sales figures up by product line and across channels. This will show you where the cash is coming from. For example:

• Does 80% of your revenue come from only 20% of your products?
• Do you sell to different markets and does one deliver more revenue than others?
• Are some of your products high value but low volume or low value at high volume?

The data you collect will enable you to ask questions, such as can you reduce margin to lift sales, can you push volume up or are there other channels to sell through?

Make sure you include all other revenue streams, such as grants, tax refunds or investment in your cash inflows.

Understanding expenses - where is the cash going to?

This will include all the costs associated with your business, including rent, wages, supply materials, bank loan fees and charges, tax bills, and electricity.

If you have a bank loan, include the details such as the length of the term and the monthly payments.

Your cash flow plan should also include tax payments when they are due and any capital expenditures.

Some of your variable expenses will directly relate to revenue such as freight or materials. When your sales stop, these will drop too, so your cash flow plan should reflect this relationship in order for you to scenario plan.

Controlling expenses - what costs are fixed and what are the variable costs that you can control? You may not be able to stop fixed expenses like rent, power and internet, but you could reduce the cash going out on petrol and travel, cleaning, and even directors' drawings.

Making informed decisions in your business

A good cash flow forecast will collate all the data from your business in one place. It will allow you to plan and work out how long your business can weather a storm. It will also help you make decisions around staffing, purchasing inventory, ordering supply materials or investing in growth.

It’s worth remembering that a cash flow plan is a different tool to a budget. Here’s one example: a budget will show sales but a cash flow plan will show the cash benefit of those sales. If you offer credit to customers, your sales may not result in immediate cash flow.

Want to get a handle on cash flow in your business?

If you’re not certain of how to get this information from your accounting software, talk to us about which reports to run. You may need a combination of accounting software reports and projected figures.

Use the information above to source the data you’ll need and get in touch. We can help you build a plan that gives you cash flow projections to assist your decision making.

Managing cashflow and accessing emergency funding

Working capital is a vital component of any successful trading business – providing the liquid cash needed for everyday operations. Suddenly finding your business without this cash can be a shock, but there are ways to fill these cashflow holes and get the company back on track.

In short, it comes down to careful cashflow management, and ensuring you have the best possible routes to additional finance and funding provision.

Key ways we can help include

Helping you understand your cash requirements

The starting point of any funding search will always be to understand what your current cash requirements are. This means sitting down to review your whole financial position. Then, armed with this information, we can see exactly how much you’ll need to borrow.

Liaising with banks and lenders

We can put you in touch with the most suitable banks, lenders and alternative funding providers, and can help in conversations with these lenders. For example, you may want to discuss the possibility of extending your overdraft facility, or whether you could temporarily suspend principal payments etc.

Preparing financial information for lenders

Any lender will want detailed financial reporting to back up your loan application. We can produce up-to-date accounts, cashflow statements and forecasts to help banks and finance providers understand your financial health and the risk levels involved in lending to your company.

Accessing government assistance

The Government is offering a variety of ways to support businesses financially during the coronavirus crisis. We can explain what loans, grants, tax reliefs or filing extensions may be available to you, and can help you fill out all the relevant forms and applications to make a claim.

Improving your debtor tracking

Outstanding customer invoices is another key area to get under control. We can help you understand your aged debt position, and identify which invoices you should be prioritising when it comes to chasing up customers and finding mutually agreeable payment terms.

Extending credit from suppliers

The coming months will be tough for many businesses, so it’s worth having open and honest communication with customers and suppliers around when payments will realistically be made. Agreeing on small discounts, part payments or extended terms will all help to increase liquidity for everyone.

It’s likely to be a rocky road for many businesses over the next few weeks and months. So, working together as a business community to support each other will be essential.

If you’d like to get in control of your cashflow management and funding needs, we’re here to help. We can help you crunch those cashflow numbers, access the best possible routes to funding and remove some of the worry during these testing times.

Talk to us about getting on top of cashflow.

The value of cashflow forecasting

During challenging times, many businesses are seeing income either disappear completely or drop to dangerous levels.

To be able to navigate the future path of your cashflow, you need to start forecasting, so you can map out your financial position over the coming months and can take the appropriate action to safeguard your cash position.

Forecasting your future cash piepeline

Projecting your cashflow pipeline forwards during a crisis is vital. Having access to detailed forecasts helps you to scenario-plan, search for cost-savings and look for strategies that will preserve your cashflow position.

Remaining in control of the cash coming into (and going out of) the business is the real focus, so you can accurately predict your financial position and can resolve any issues.

Key ways to get more from your forecasting

Run regular forecasts

The financial landscape is changing on a daily basis at present. A cashflow forecast is not a document that remains static. Variables and external drivers are literally changing each day, so it’s vital that you run frequent forecasts and react swiftly to any projected cash issues as they become apparent.

Use the latest cashflow forecasting apps 

Cashflow forecasting apps, like Futrli, integrate with your Xero accounts, giving a drilled-down view of how your cash inflows and outflows will pan out over the coming months – information that will inform and justify the decisions you make during these extremely challenging times.

Explore the right revenue streams

Most sectors will have seen their face-to-face sales drop to absolute zero since quarantine restrictions came into place. To overcome this, there’s a real imperative to explore revenue streams and new opportunities for income. An example of this is coffee shops that now sell roasted beans online (this will depend on lockdown restrictions). The idea is to find ways to increase the money that’s coming in the door and balance out your unavoidable expenses.

Get proactive with cost-cutting

If you can reduce cash outflows to a minimum, that will have a real impact on the health of your future cashflow. Pare back your operations and aim to reduce things like unnecessary software subscriptions, or over-ordering of basic supplies. Negotiating cheaper rates with suppliers, if possible, will also help.

Review your staffing needs

Now’s not the time to make anyone redundant, but you can look at ways to reduce the costs of staffing and resourcing. Reducing working hours or redeploying staff in different roles are all options that reduce payroll costs, while also looking after your staff’s welfare.

Run a variety of scenarios

Changing the financial drivers in your forecast model allows you to scenario-plan different strategies and options. Many of these will be in a long-term plan when restrictions ease. Scenario-planning lets you answer questions and will give you some hard evidence on which to base your decision-making and strategic outlook over the coming months.

Look at various ways to access funding

If forecasts show a giant cashflow hole coming up, you’re going to need additional funding to get through this crisis. We can assist your business to investigate funding opportunities from grants, banks, loan providers, alternative lenders and crowd-sourcing funders.

Forcasting is an important step to give you the business intelligence to support your decision making.

Talk to us about setting up cashflow forecasting.  Get in touch.

Understanding your profit and loss statement

Your profit and loss statement (P&L) helps you understand your business performance and profitability over time. It’s sometimes called an Income statement and its main purpose is to list income and expenditure.

Whereas a balance sheet is a snapshot in time, the P&L shows transactions over a specific period of time. This can be a month, quarter, financial year or any other period, and it can be a stand-alone report or a comparative period report.

Together with the balance sheet, these two reports provide a comprehensive understanding of the financial position and performance of a business.

The profit and loss statement has two main sections: income and expenses.

These may be further subdivided depending on the complexity of the business and reporting requirements.

Income or Revenue

Income primarily includes main business activities such as sale of goods or services. Other income such as interest received, capital gains or income from secondary business activities is also reported.

Expenses

Expenses are usually divided into two sections: direct costs, or cost of goods sold, and expenses. Cost of goods are those that are directly linked to the provision of services or sale of goods. For example, if you buy widgets from a wholesaler and sell them at a marked-up value, the cost of the widgets is a direct cost, not an overhead expense.

Other types of direct costs might be importing and freight costs, contractor costs or certain equipment. Some direct costs are fixed, that is, they are the same from month to month, or they could be a fixed percentage of sales; others vary in value but are still related to the income producing activities.

Overhead expenses are all the other expenses required to run the business, regardless of the level of income: for example, rent, utilities, bank fees, bookkeeping fees, professional development costs, vehicle costs and staff costs. Many of these costs form the basis of working out your break-even point, or how much it costs just to open the doors for business.

There are some expenses which may be reported as a direct cost in one business but an indirect cost in another type of business, for example, merchant fees or contractor costs.

The Bottom Line

Total income minus total expenses results in the net profit (or loss), is often called ‘the bottom line’. Often business owners are just interested in looking at the bottom line, but a true financial picture requires an understanding of several reports and an ability to see the big picture that the reports are illustrating.

The P&L is a vital tool to analyse for trends over time

• What does your P&L tell you about relationships and ratios between sales and expenses, seasonal changes and annual trends?
• Have all your direct costs been allocated correctly?
• Have you recouped all billable expenses from customers?

Financial statements help you understand the big picture for your business. With deeper understanding of your business operations and performance you can make informed decisions about your business finances.

We can help you.

Are you confident in reading your profit and loss statement? Would you like to know more about the relationship between costs and revenue to make better business decisions? Contact us today to examine your financial reports with an experienced business advisor.

Contact us here.

Finding the balance

Looking for a little more work-life balance?

Sometimes it seems impossible when you are in the thick of it. The following ideas might help provide some light at the end of the tunnel.

Prioritise

Work often dictates to us, rather than the other way around. Create a list of all the things that need doing and categorise them. For example, work out the tasks that are ‘important but not urgent’ and ‘urgent but not important’. Task or project management tools like Trello can simplify your workload and and help to prioritise your time.

Delegate

Letting go can be an opportunity for others in the team to shine. Alternatively, bring in a contractor to help clear the load and you may find they bring in new ideas, create opportunities or streamline the process. Don’t limit yourself to what’s on at work - think about what would help at home too, such as a meal kit delivery to simplify the end of the day.

Book it in the diary

We are all guilty of putting off an exercise class or a coffee catch up because work takes over. These events are important for your mental and physical health and may give you space for creative thought or the ability to think with more clarity. Plus, you’ll return to work feeling more productive. Book it in and consider joining a group so you are more committed to turning up!

Use the technology to help you

‘Always on’ technology such as smart phones are designed to make life easier but we’ve ended up busier than ever. So choose the apps and tools that can reduce the stress. Whether it’s for communication and meetings, or your filing and accounting. An app could save you time and allow you to get on with other things - read more on apps. We can help with the right accounting software solution to reduce the paperwork.

Share with your network

Are there individuals in your network who face the same challenges or can help you achieve your goals? Set up a monthly breakfast to catch up, support and learn from each other. You’ll go back to work with new inspiration.

Do what you love

At the end of the day, your work is ‘part of’ your life not separate from it, so if you enjoy it, you’ll feel you have more ‘balance’.

Get in touch to talk about how we can help you achieve balance in your business.