Talking Cents

Importance of cash flow and your invoicing process

Regular cash flow is an essential part of any small business and this is especially so for a new business in its infancy. Often all capital has been invested into getting the business established and up and running in areas such as plant and equipment, legal and accounting advice and rental bonds for leased premises. Therefore it is crucial that your business has a detailed plan for invoicing customers in a timely manner as well as focusing on the collection of outstanding income.

Often, for a retail business, customers pay on the spot so therefore a collection policy is not as important. For manufacturing and service based industries the collection of outstanding debtors can often make or break your small business.

Some small businesses will wait until the end of month (and sometimes a week after that) to invoice work done during the month. This is not going to help your cash flow. By putting off the actual date of the invoice by a week, the customer will typically have 30 days to pay that invoice. Therefore if you complete a particular job on the 15th of the month, the client then gets invoiced on the 31st of the month and then pays 30 days later, you will not have received your invoiced income until some 46 days after the work was completed.

In tough economic times, this sort of time scale can lead to all sorts of problems within your small business, including, but not limited to, falling behind in ATO payments and other compulsory obligations. You can also hurt supplier relations by not meeting their payment terms due to your own lack of discipline in debtors and cash flow management.

So the lesson from your small business accountant today is to have a strict policy in place for your business, not just on invoicing and collections, but who this role is assigned to. Remember, whilst we do need to be friendly and respectful towards our customers, they also need to appreciate that you need to be paid for your services in a timely manner. After all, they would expect the same from their customers.