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How accountants and small business tackle the cash flow gap together

on . .

One in five invoices payable by ASX 200 companies to small businesses are overdue by more than 30 days, And according to a recent survey*, the majority (62%) of small businesses do not think they could survive beyond the next three months if all invoices owing were left unpaid.

The cash flow gap is a real issue in Australia and, as we await the findings of a government inquiry into the issue, advisors are busy helping small businesses navigate the pitfalls. To learn more, we spoke to accountants Artur Durbanov and Domenic Stramandinoli of Nexis Accountants and Business Advisors and Craig White, the owner of Bridgestone Service Centre, to learn how they kicked Craig’s cash flow challenges aside.

Setting the scene: the extent of the issue

Craig’s clients often paid him up to 120 days late, meaning Craig occasionally had to max out his credit card and forgo his own salary to ensure his employees were paid on time. He engaged Nexis Accountants and Business Advisors to help him tackle the issue.

Step one: manage expectations

As a first step, Artur and Domenic suggested they work together to forecast the business cash flow, and create an ongoing action plan for improvement.

“We made it clear at the outset it wasn’t going to be a quick fix and that part of this goal relied on Craig getting out of the back office and back into sales, which is what he is good at,” says Artur. “Craig signed a commitment that said he was going to stick to this plan – and he did. All in all, the project took one and a half years.”

“I knew the cash flow challenge wasn’t going to be a quick fix,” agrees Craig. “I think it’s important for anyone in a similar situation to understand that it can take years to fix cash flow challenges but, obviously, it is so worth doing.”

Step two: dig deeper into the numbers

Next came a more detailed analysis. Because Craig worked so closely in the business, he hadn’t realised just how much it was impacted by cash flow.

“Early on we did a pretty detailed analysis of his debtors and creditors, and we worked out that 30 percent of Craig’s debtors at the time were over 90 days or more late,” says Artur.

“It turned out that those debtors were equivalent to around $40,000 in unpaid bills. If they had been paid on time, it would have covered the business debts in one hit.”

Step three: commit to a systemised approach

Quarterly meetings were then scheduled to stay on track with their cash flow forecast, based on this information.

“We set up a plan that looked at how we were going to improve cash flow,” says Artur. “Then we highlighted three areas in the business that were affected by this issue – payroll, compliance and sales.”

Step four: turn knowledge into action

Armed with those insights, Artur and Domenic used ‘tough love’ to help Craig understand when to cut ties with slow-paying accounts, and when to proactively chase bills.

“It’s all well and good to have sales and the big customers on account,” says Artur. “But if they’re not paying, are they good customers? The sales that aren’t being paid aren’t worth much and you have to pay tax on them if they are on an accrual basis, which means you’re generating a liability for the business,” he says.

“In hindsight, I can see how much it benefits any business to chase overdue bills as soon as they’re overdue,” Craig adds. “Otherwise clients may learn that you let accounts slide, and they can ‘test’ you, to see how long they can hold a bill out for.”

Step five: track the impact of key decisions

Despite cutting some key accounts for good, Craig’s business revenue continued to rise and the improved cash flow benefited the business.

“That was a clear turning point for Craig,” reflects Artur. “As a business owner, you have to remember you’re not the bank for your customers, and you just can’t afford to be the bank for your customers – especially with no interest.”

Step six: divide and conquer

As the importance of cash flow became ever more evident, Craig decided to hire a bookkeeper.  

“It was a risky decision because it represented a substantial cost for the business,” he says. “But we worked out that the business was losing money because I was managing the books so closely, and not on the floor selling.

“Clients respond well to our bookkeeper, and pay more promptly. It’s definitely improved our day-to-day cash flow.”

Step seven: enjoy the effects

These days, Craig’s business is tipped to exceed projected revenue targets. And while he is never complacent about cash flow challenges – which can still creep if not watched closely – the business that he bought over two years ago is now thriving.

“Not only did Craig pay all creditors in the first seven months of operation, but he can now purchase some equipment outright without leases,” says Artur. “This is virtually unheard of in his industry.

“There is so much more cash in the business now. His revenue just keeps going up, year on year.”

Artur’s tips to aid your cash flow

  • Use automatic reminders: “Xero’s automatic reminders go a long way to chase client payments. Just set this up and all accounts are all automatically reminded. This way, you aren’t personally having to chase clients.”
  • Use the dashboard: “The more you pay your bills on time, the better your cash flow picture will be. Use the dashboard to quickly check who is owed and what bills are due.”   
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