• Jeannie Doherty

Cash Is King

Updated: Nov 20

In this article we’ll explore Cash Flow.







“Many profitable businesses have gone broke due to a lack of cash”


That statement often confuses the hell out of business owners. How can you be making a profit and have a Cash Flow problem?


The simplest example I can give of a profitable business having a Cash Flow problem is “when that business collects money from it’s customers AFTER it pays its bills”.


Many business owners find themselves in this predicament when they elect to or are forced to offer customer accounts. It’s a simple matter of money going OUT before it comes IN.


At this point, if you’ll “stay with me”, I’d like to very briefly explain the difference between cash and accruals. I know, yawn! But I promise I won’t waffle on or try to turn you into an Accountant.


Cash profit is calculated by looking at when customers PAY in and when you PAY your expenses. It’s looking at the profit and loss based on the actual movement of money.


Accrual profit is calculated by looking at when you “INVOICE” customers and when expenses are “INVOICED” to you. It’s looking at the profit and loss based on when you “create” the sale or bill, regardless of whether it was paid, or on account.


Now I could continue down this rabbit hole but I don’t believe that would serve you anymore than asking you to become an electrician would serve you in being able to turn on a light switch.


What will serve you is understanding which “levers to pull” to influence Cash Flow.


Just like flicking a switch turns on a light, pulling these levers will create more positive Cash Flow and more actual cash in the bank in your business, irrelevant of your profit.


Customer Payment Terms


In my opinion, customer Payment Terms is the single biggest lever of Cash Flow (when profit isn’t the issue).


What are your customer payment terms? Could they be improved?


Some businesses, like my bookkeeping practice for example, collect payment from their customers in advance of all their obligations being paid out. And this my friends is the holy grail of positive Cash Flow.


I didn’t always do that. I too learnt the hard way how stressful managing Cash Flow is. But I also know that


“The definition of insanity is doing the same thing over and over again and expecting different results”


And so I made changes to create a Cash Flow positive bookkeeping practice. And let me be clear. A Cash Flow positive business is good for everyone. Staff, customers and suppliers. Because a Cash Flow positive business is a more “solid, viable business”, more likely to survive and thrive, benefiting everyone involved.


Many business owners I’ve worked with have resisted asking their customers for

  1. Payment up front

  2. Bigger deposits

  3. Shorter payment terms


But every time they have, they’ve been surprised by how well new terms have been received. They’ve told me how shocked they’ve been when customers were simply happy to pay up front in full, or leave much larger deposits.


If your customers currently pay in arrears and you are ready to try and make some changes to improve your Cash Flow, here are my recommendations.


Start by writing up a set of best practice customer payment terms for all new customers.


The terms you set for customer payments will be influenced by the industry you’re in, what the market will bear etc. But, it won’t be 100% driven by that and you can do better than most!


The best case scenario is that customers pay you

  • On invoice

  • In advance of work being done (or goods being taken)


If you’re a small business, don’t be afraid to gently explain to your customers that the reason you offer credit card in place of offering accounts is due to Cash Flow restraints because you don’t run an overdraft facility. You’re not in the banking business, but credit card companies are! And some credit card companies offer up to 6 months interest free. That’s better than any terms you can offer. Makes sense right!


If you ask your customers to pay on receipt of invoice and a few say no, then you can negotiate down from there and still ask for


  • Larger deposits

  • Shorter terms ie: 7 or 14 days


Do consider including these types of terms on your invoice fine print


“In the unlikely event that your invoices fall overdue for payment, administration fees will be billed to you to cover our costs, plus interest charges, plus any costs associated with debt collections”.


You can take that statement further by outlining actual fees however that’s a good start. You simply can NOT afford the profit leakage that comes with overdue invoices, little own the Cash Flow lag.


And if you do use terms like this then DO follow through by sending a bill for your administration costs when you’re unable to collect. You might be surprised how fast they pay.


Move onto changing trading terms for existing customers

Many business owners find this one particularly hard. They’re worried customers will go elsewhere. There is no easy advice that I can give you here. You know your business and your customers. You also know if Cash Flow is keeping you up at night. To rinse and repeat for a moment, what I do know is that


“The definition of insanity is doing the same thing over and over again and expecting different results”


If Cash Flow problems are stressing you out and if “poor customer payment terms” is at the root cause then you need to get a start on improving them.


I worked with a plumber some years ago who, at the time, was dealing with a lot of Real Estate Agents. The same repeat offenders simply avoided payment. Once I shone a light on the gravity of the problem and showed them that the time and money they wasted chasing debts chewed up all of the profit anyway, they began to see the insanity of the situation.


They also began to realise that these bad payers actually needed to be dumped as clients.


Problems don’t get fixed by avoiding them so start taking action today and little by little you’ll improve your Cash Flow.


Supplier Payment Terms

Now that you understand the importance of getting payment from your customers asap, understanding how to pull the “supplier payment terms” lever should be easy.


Pay your suppliers after you get your money from your customers.


Right about now I’m hoping to hear you saying “ahhhhhhhhh”.


Pay OUT after you receive money IN. Not the other way around, got it!


Negotiate the best payment terms possible from your suppliers in order to positively influence your Cash Flow.


Payroll Calendar

Payroll Calendar. A Cash Flow lever “personal favourite”.


Because, it’s like a hidden gem in terms of improving Cash Flow and actually, even in terms of saving time and money.


In 2018 I began working with a furniture manufacturer named Cameron. Cameron told me that one of his major worries was not having enough funds to pay his staff or his bills on time. Cameron’s profit was ok, sufficient to cover obligations but he had, without realising it, employed poor Cash Flow practices which were emptying his bank account before he could pay his bills.


Some of this pressure came from buying timber in bulk (to obtain a decent discount). But the discount was definitely significant enough to justify this decision.


Some of the pressure came from his customer payment terms. They weren’t shocking, but they could be improved and he was up for that.


The Cash Flow pressure he couldn't see and actually didn’t want to tackle was in his payroll calendar. Cameron was paying his staff weekly on a Friday. To illustrate the Cash Flow pressure caused (and how it could be eased), I’m going to deconstruct his payroll a little (in true, Strategic Bookkeeper Style).


  • His payroll calendar was “weekly, Monday to Sunday”

  • His payday was Friday, in advance of the last day of the week, being Sunday

  • It’s true, no-one worked on a weekend however, a week is a week, in terms of payroll calendars


That my friends is a Cash Flow pain trumped only by business owners who pay their staff even earlier than the Friday! Ouch!


For every day you push out payday you build up your bank balance. This applies to the other levers too.


In the case of Cameron’s business, let’s say a day of Cash Flow is equal to about $857 per day. If he changed his payroll calendar and payday to a “best practice” scenario here’s what that would look like.


  • Fortnightly calendar Monday to Sunday

  • Pay on the Thursday after the fortnight closes


This would create around $7713 more cash in the bank covering his whole payroll and leaving excess in the bank.


The knock on effect is also that a fortnightly payroll means less administration costs overall. It’s the same job, done fortnightly saving time and money.


If you’re ready to improve your payroll calendar and pay day, my advice is to

  • Give your team 3 months notice (trust me, they’ll need it)

  • You’ll likely find 20% will struggle, even with the 3 months notice

  • Don’t let the 20% stop you from preceding, discuss ways you might be able to help such as a staff loan


The efficiency of your payroll is a piece of the Cash Flow puzzle and improvements here will help you improve your overall business performance.


Inventory Days

You purchase inventory from suppliers and we’ve already discussed “supplier payment terms” as a Cash Flow lever.


Inventory days or stock-turns is a lever closely linked to supplier payment terms, let me explain.


Inventory days or stock-turns is about the length of days your stock sits on the shelf. It’s about whether your customers buy and pay you for inventory, before you pay your supplier.


For example, if you’ve negotiated supplier payment terms of 60 days then you’ve got 60 days to sell that stock and collect payment before you’ve got Cash Flow pressure due to stock-turns.


The retail business I was helping grow from 10 million to 100 million dollars had stock turns licked. In fact, from day one (yes, I was there on day one), they ran a Cash Flow positive business. Was this one of the keys to their success? Of course it was. Do you think that they could have pushed ahead like they did, eventually selling for 24 million dollars with poor Cash Flow management. No.


To illustrate the influence of all of the Cash Flow levers we’ve discussed a little more, I’m going to expand on Cameron's story.


If Cameron took the following


  • Optimal payroll calendar implemented $7713 per month

  • Increased deposits from customer of 30% equal to $18,000 per month

  • Improved supplier payment terms of 7 days $5999 per month

  • Even with no improvement in stock turns


That would provide him with $31,712 more cash in the bank through improved Cash Flow management.


Please don’t underestimate the importance of Cash Flow management. Too many business owners make the mistake of focusing solely on turnover only, but...


“Turnover is Vanity, Profit is Sanity but Cash is King”


That’s not just a cute saying! It’s a financial principle to run your business on.


I recommend that you focus your energy firstly on pulling the Cash Flow levers before putting your energy into Cash Flow forecasting.


In terms of Cash Flow you also need to manage

  • Owner Drawings

  • Employee Obligations

  • Loan Repayments

  • ATO Obligations


However we’ll deal with these little treasures in my next blog on profit.


If you haven’t already used any of our great free tools I’d encourage you to check them out.


You can download a Cash Flow forecasting tool here which includes a how to video.


Plus, you can register to attend a free planning mastermind with me personally, take our digital diagnostic scorecard or book a free discovery call.


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