Episode 45: Healthy cashflow management
March 14, 2022
Our previous episode on saving money (which can be found here) has been one of our most popular episodes to date. So Sarah and Trudi revisit the topic to run through some more tips on how to save money and how to properly manage your cash flow so that you can save your money. From separate savings accounts, to reducing spending to shopping around the girls break it down it to useful usable steps to ensure you have more money in the bank. The Government's Moneysmart website also has some really great tips and tools that we reference and highly recommend you check out.
Podcast Transcript Available Here
Duration: 28:20
Trudi Cowan: Welcome to Season Three of the Financial FOFU podcast, where we talk all things finance, money, and mindset. To find out more about us or to listen to some old episodes, you can visit us on our Instagram or Facebook pages or check out our website. So let's get into it today. Sarah Eifermann: Hello everyone. Welcome to today's episode of the Financial FOFU podcast. Our topic for today or episode is Healthy Cash Flow Management and Budgeting. Trudi Cowan: If you've been listening, the last few weeks, you'll have noticed a little bit of a theme in terms of what we've been going through, how to understand your financials and break-even, and the pricing of your products. So this is just the next step in those chain of episodes. Sarah Eifermann: Absolutely and I think when we decided to plan out this season, we really took all the questions that we were getting from our clients and tried to put them into a nice flow. You know, it's kind of like if you were to do a mini-course, like what would the chapters be? Trudi Cowan: And is this all?[inaudible 1:25] Sarah Eifermann: Yes, how to set up and run a business or run a business well, and profitably. I know we harp on so much about this but honestly, I can't say it enough budgeting and cash flow to support your goals and be profitable and make money. They're non-negotiables in business, and I know 99% of you don't do it. Trudi Cowan: They say cash flow is king for a reason. If you don't have cash, you can't pay your suppliers, and if you can't trade to these suppliers, then you can't trade, if you don't have a business. Sarah Eifermann: If you're a company or a trust with a corporate trustee, you're trading insolvency and we did deal with this in Season one. If you are trading insolvency, you're in breach of the act, and there are some significant consequences that come with that and you sign a solvency declaration every year. Trudi Cowan: Yes, so you can't sign it if you're not solvent. Sarah Eifermann: This is my point, right? Responsibility to your financials as a business owner. So let's get stuck into it. I mean, we've talked about budget before, there's a budget episode you can listen to. I don't think we've really, ever really, really, ever really, how many really, can I put in this sentence? Have we ever discussed cash flow like it's in forecasting? We've touched on it, but I'm not sure we've ever really broken it down as to what it is. Trudi, do you want to give an example of what the difference is between budgets and cash flow forecasts? Trudi Cowan: So normally, when we're looking at a budget, we're looking at a Financial budget. What is your profit going to be? What are your income and expenses for a particular month or financial year going to be? Sarah Eifermann: It's almost like, what do you want them to be as well. So they are based on the data that you have, a budget is like what your plans are or your expectations of spending are. Trudi Cowan: Whereas cash flow is looking at the timing of your cash coming in, and your cash going out. Sometimes it's close to what your budget and your profit are. In other cases, it can be completely different. If you've got customers that you invoice and they don't pay you for 60 or 90 days. Sarah Eifermann: Yes. Trudi Cowan: When you record that income for a profit and loss or a budget purpose is a completely different timing, to when you're going to have that cash come in when you're looking at a cash flow perspective, and it is really important to look at the cash flow forecasting, particularly if you do have longer terms of your cash, invoice terms, and your cash coming in. So that you can make sure when you need to pay your expenses does have some relativity and matching to when that cash is actually going to come into your business as well so that you can pay those bills. Sarah Eifermann: Completely. I think a really good example of that is insurance. So people have insurance, like an insurance bill that they need to pay that's coming in annually, it's usually annually, and it's usually a big expense [crosstalk 04:35]. It's a big expense, and it's usually like a set price like you know how much your insurance is going to be. But if you don't put the cash away to pay that bill, even if it's in your budget so if everything's based on the financial year for you and you pay it into the financial year for the new financial year. Sarah Eifermann: So your payment is due in June, but your work is seasonal and it's summer-based where you make the most of your money, you sell ice screams,[crosstalk 5:05] oh, air conditioning was where I was going and you don't, then really. You trade well until March, then you don't really trade well again until October, but your big bill is due in June. If you haven't planned and budgeted to put the money away for the June bill and factored it into your cash flow into when the money comes in and out of your bank account based on people paying you, you won't have money to insure your goods. That's in June, so you need to be able to then either take a payment plan, and there's an insurance equipment finance that we can do that allows you to take those payments over 11 set terms, it's pretty reasonably priced as well. Insurance premium funding, that's one option. Sarah Eifermann: You can see whether the funder for your insurance takes half-yearly payments, perhaps and maybe you make a big payment in December, maybe you need to move the insurance due date [crosstalk 06:15]. The renewal from June until October or something of the like. So you take a small policy for three or four months to change the renewal date so that you can do it. But if you don't know those things, you can't do any of them. Trudi Cowan: Yes, you can't forecast. And there are lots of other examples. If you import goods that you didn't on-sell, typically you're paying for those goods upfront and in some cases, before they're even manufactured. So it might be three months between you making the payment for the goods and you even receiving the goods to be able to sell them. Then it might take another six or 12 months to sell all of that stuff. So you need to make sure that your cash flow planning is done in a way that you have the cash to pay for those goods and then you can still trade through on presumably your other stock, until you receive it then have that stock come in, to be able to sell it. Sarah Eifermann: Or do you need to look at another way, like pre-sale of goods where you have people pre-purchase and pay a deposit. But again, you can't do any of that, if you don't know what your cash flows going to look like. And if you haven't done a budget to work out what your expenses are going to be. Trudi Cowan: Look, we could probably sit here and throw out examples to you. We'd be here all day,[crosstalk 07:34] very different type of business, but it just shows the importance of sitting down and looking at a cash flow budget. And you know, depending on your circumstances, you might only do it for the next three or four months to plan out, that this is what's going to happen. Or you might literally sit down for 12 months, and be able to say I know that I'm going to need to order stock in these particular months. But I know that I'm not going to receive it until these months, so therefore the incomes probably not going to come through until then. Trudi Cowan: But then you would also factor in your other expenses. So when does your big insurance bill come in? What are your wages going to be every single month? When do I need to pay my bills? To pay my super? When are those other big expenses going to come through, in terms of timing? And if I'm not going to have the income coming in those months, or the cash coming in those months to match those big expenses, have I put enough aside in a reserve account or a savings account to make sure that I do have the cash reserves, to meet those big bills when they come through. Sarah Eifermann: Absolutely. I just say that's all good, completely gone. My brain is blank. Trudi Cowan: So what we're saying, cash flow is really important. It's not just about your profit, it is also about your cash and the timing of your cash. So maybe if we jump into a few tips to help keep a good, healthy cash flow. Sarah Eifermann: Actually, there are templates on helixplan.com.au If you want to download a budget and a cash flow forecast, they're really reasonably priced. I think they're under 50 bucks for both and you can have a crack at this yourself. There's also a budget tool within Xero and QuickBooks depending on your subscription, they're not cash flow tools though. Trudi Cowan: They're not comprehensive, but they do provide useful information. Sarah Eifermann: You can kind of hack them to sort of give you an understanding then work out in your head what you need to have in your bank account for those months, so they're there as well. Trudi Cowan: Or if you want something more complex have a chat with your accountant about some of the other integrated tools that you can get. Sarah Eifermann: Yes, there are other software programs, Quickbooks, [crosstalk 09:40] there are software programs like Plugin is another option as well. So all right, our tips for healthy cash flow management and budgeting. Trudi Cowan: Monitoring your cash flow regularly is number one.If you're not monitoring what your cash flow looks like, Sarah Eifermann: Define regularly, Trudi? Trudi Cowan: Depends on how I was going to say [inaudible 10:01] Sarah Eifermann: You are an accountant. Trudi Cowan: Look, at worst, at least monthly, you know? Yes. More regularly is useful and again, it depends on the size, complexity nature of your business as to how regular you need to be doing it, but at a minimum absolute being monthly. Sarah Eifermann: I would say weekly, daily is just psychosis-related. You're in trouble if you're monitoring your cash flow daily. But that highlights some other issues. I would say weekly, especially if you're paying like weekly wages and things like that, where you have commitments, statutory commitments to staff, you probably need to know that you've always got enough money to pay your staff on their pay cycle, and you've got enough money for the next pay cycle coming through. Trudi Cowan: Yes. Make sure you're reviewing your costs and expenses regularly. Do you really know how much you guys are spending on materials? Are you really aware of the increase in, say, food costs if you're a restaurant or food-type business? And are you looking at alternative suppliers and sources of the various products and services? you need to make sure that your costs are appropriate and not any higher than they need to be. Sarah Eifermann: This is a challenging one, especially if you're in the construction trade-related industries at the moment because the custom materials are going through the roof and the supply chain issues on the delays, creating all sorts of dramas, and if you've quoted with set price quotes, and don't have a clause in there regarding the material increase, and factors around that, at the moment, it will actually impact not only a cash flow, big profit. Trudi Cowan: Definitely will. Sarah Eifermann: Also, I would say, reviewing costs monthly. Trudi Cowan: This comes back to again, how you're recording your expenses. Because if your expense categories aren't detailed enough, you're not actually going to have useful information, to see what you're spending on those different categories. Sarah Eifermann: Exactly and reviewing costs. Cut and refine, is what we're talking about, but also efficiencies in your business. So cost-cutting might not just be dropping back your phone bill, it might be enabling your staff to be more efficient in the labor that they spend on a job and doing things faster so it doesn't cost you as much labor to complete that task. Trudi Cowan: Or it might be that you don't actually need full-time staff, you actually need a couple of full-timers and a couple of part-timers. Or you need some casual staff so looking at the mix of your staffing arrangements, or even your contractor arrangements, is also another aspect of that to make sure that you've got the flexibility to meet the different needs of the business. Sarah Eifermann: Absolutely and talking about needs of the business lease equipment where you can, instead of buying a lot of people don't like debt, and I can appreciate that 100%, but if a machine that you need to buy or a cutting tool or kitchen equipment, depending on what industry you're in, is going to set you back 50 or $100,000. When you're starting out a business, it's a big hit to your cash flow. Funding can be more complicated when you're a startup business. Absolutely. Yes, it may be more expensive than if you trade for two years with an ABN GST registration, then go and get finance.If you've done your research, done your budget, and done your cash flow projection, you can make better decisions about whether or not you can afford to lease at a slightly higher rate than purchase outright and take the dent to cash flow. Trudi Cowan: Definitely, leasing is a great option in terms of just smoothing out the cash flow movements rather than having it lumpy. Sarah Eifermann: I suppose it's important to say as well, I mean, leases is used as a general term for using alternative funding for your goods but a lease or a commercial higher purchase or a commercial loan. We're really just talking about getting lending for your equipment, rather than you paying it with cash. Trudi Cowan: Look, when you're making these big purchases as well or even, you know you're smaller regular suppliers, make sure you're negotiating with your suppliers where possible. You know, it's not always possible but if you are able to make sure you're negotiating to get that best possible price with your suppliers and that might be something as small as a discount, if you pay on time or a little bit early. Those things can all still help your cash flow. Sarah Eifermann: Like they do within electricity companies, if you pay on time take 5% off this bill. Trudi Cowan: I find even depending on who you're with sometimes, right? So maybe it's insurance, if you can afford to pay them upfront, you'll get a little rate discount, right? Yes, you get a little bit of a discount than if you pay it by the month. Sarah Eifermann: I mean there might be insurance companies that are offering the same thing. Trudi Cowan: So looking at those sorts of offers, if you can afford to pay the upfront, and it's not too big of a hit, then maybe it's worthwhile having that saving down the track, but maybe it's not, maybe it's better for your particular cash flow to take that monthly option. You need to consider all these little factors. Sarah Eifermann: But know the difference. Trudi Cowan: But know the difference? Yes. Know how much more you are paying, to take that monthly option. Sarah Eifermann: And how that impacts your business. From a profitability point of view, not just a cash flow point of view, which leads us into invoicing as soon as you can. Trudi Cowan: It's not just about your expenses, it's also about your income, finish the job, send your invoice out. Sarah Eifermann: So often a problem and especially where husband and wife partnerships struggle with this because they're so busy on-site, that once the job's finished, like the communication of we need to invoice, even potentially invoicing in smaller payments rather than larger lumps. Because you might be able to get that money coming in earlier, that can make a difference as well. Highly recommend, if you're using a job management software, like a service mate, or an arrow flow, or one of the hospitality ones potentially that links with your suppliers with your income, that your invoices are going out. If you've got wholesale accounts or anything like that, as soon as they need to go out. Trudi Cowan: Yes and to give some example of this, I mean, I've spoken to accountants who are like, I can't bill as soon as the job's done, that's rude for me to finish the job and send a bill but I'm like, why? You've done the job, why aren't you then entitled to send the bill out? Versus I know, other accountants who will bill before the work is done. So decide where you want to be on that spectrum. You know you don't have to bill upfront. It's a great option if you can, but there's no reason why you need to delay sending that bill at either once you've completed the work. Sarah Eifermann: No, some of my bills go out pre-appointment and some, with balance, paid at the end of the appointment, and I send the bill straight away. Mainly, because that's when I remember to send the bill. If I don't I will forget. It's also a habit because that's what I decided I was going to do, and therefore I know that job is done. Move on to the next thing. Yes. Whereas having to then remember to go, do my invoices, is just not a great way to run a business. Sorry, if that's what you do now, but I don't think it's a great way to run a business. Trudi Cowan: If you are a service-based business, make sure that you are keeping track of all those little jobs and you are billing for all the little ones as well as the big ones. Because sometimes it's very easy to forget the little things and think I'll do that later and then later never comes. You're missing out on revenue within your business. Sarah Eifermann: Exactly. Encouraging your customers to pay early, kind of comes off the back of that as well. Maybe it's something we just talked about asking and negotiating prices with suppliers. Maybe it's something that you can offer your customers that if they pay early, they get a 5% discount. Trudi Cowan: Yes or conversely, if they take too long to pay. You can charge them some interest or have some penalty. Sarah Eifermann: Terms of trade? Right. Trudi Cowan: Yes. For them impacting your cash flow by not meeting the payment terms? And today we're looking at payment terms. What are your terms? Is it immediately on the invoice, say 7 or 14 days? Or are you at 30 or 60 days? And if your terms are on the longer end? Why is that? Is that because that's the industry set standard and all that you're able to get away with. Sarah Eifermann: Sometimes you won't get to control that the supplier you're providing service to is on you know, 60 days, end of the month, and you don't get a say, that's just it. Trudi Cowan: Speaking of that though, know when your suppliers pay their bills. Sarah Eifermann: Because [crosstalk 19:19] make sure your invoices are in that queue to be paid for the relevant month. Don't miss your cut-off. Trudi Cowan: No, because if it is the end of the month, don't send it on the last day of the month, because there's probably some sort of approval process to [inaudible 19:30] bill them a week before. It's a process, it's scheduled and you get to get paid a lot quicker. Whereas if you invoice them on the first day of the month, but they don't bill until the last Sarah Eifermann: That's right, Trudi Cowan: You're straightaway, giving yourself 30 days before you're going to get payment [crosstalk 19:47]extra days before you are going to get paid. Sarah Eifermann: It's a very relevant point of view. So terms of trade are really important 60 or 90 days? Are there any penalties? Are there any discounts if you haven't had your terms of trade checked, stop there. It's also really important for when people like, what your dispute resolution process is because another big impact of cash flow is you go, and you do some work then someone says, I don't like what you did. No, I don't like the product you gave me, I'm not going to pay you the balance. So if you're not charging them upfront or billing in smaller increments, you then could be potentially left with a very large bill that you're then having to chase because they've decided that they don't want to pay it. If your terms of trade aren't binding, then they could potentially get away and get out of not paying you. Trudi Cowan: Cause all sorts of problems or if you have to go down a debt collection route, then it's going to be a charge on that you're not going to get the full amount back, all those sorts of things. Sarah Eifermann: Here's the thing for debt collection, don't wait. Trudi Cowan: Oh, no the sooner you chase, the more likely you are to recover the amount. Sarah Eifermann: If you've got set terms of trade, have a policy in place that explains to your customer, our terms of trade are 14 days. If you fail to make payment within 14 days, and we have not received an additional payment by the 21st day we will automatically refer you to debt collection, which may impact your credit. Trudi Cowan: Unfortunately, I have had decided on a couple of customers over time that I'm not going to do any more work for you until you get your bills up to date. You know, sometimes you have to take that tough stance, yes, you may lose a client over it but is it really worth having a client, not actually paying you anyway? Sarah Eifermann: I've got one right now and I don't like it. What's the right thing to do here? It's the second time it's happened. So Trudi Cowan: If you have a policy and a plan in place of how to deal with it, if it does happen, it's easy for you because you just follow those steps. Sarah Eifermann: Yes, so that difficult conversation piece becomes less difficult because you have and the more you do it, the more comfortable you will be doing it as well. Trudi Cowan: Definitely. So anything you can do to encourage your customers to pay early, pay on time is just going to help your cash flow and help you to budget and forecast your cash flow. Sarah Eifermann: What about managing your stock? Trudi Cowan: Well, we need to be aware of what's selling well, what's not, because if it's not selling well, you've probably already paid for that stock to be sitting in your shop or a warehouse. Trudi Cowan: If it's not moving, it's not making you[crosstalk 22:19] you're only paying for the floor space. So you need to monitor your stock levels. And maybe you need to further promote or put a discount on any stock that's not moving to get it out of the warehouse. If you've got the ability to return stock to the supplier, maybe you need to take advantage of those terms or arrangements where you've got stock that isn't moving. Sarah Eifermann: Even if there's potentially a penalty, a small penalty to return it. If there's a 5 or 10% cost to send it back, that may be more beneficial for you, than keeping it on your floor and not being able to sell it. Trudi Cowan: Yes, because that 90 or 95% of the cash that you get back, you can then invest into stock that will move you and will make you money ,and will be profitable. Vice versa, if you've got stock that's moving really quickly, and you're selling it really well, sell lots of it but that also means that you need to make sure you're ordering it with enough lead time to get it in, then be selling it out. So it is really important to be watching your stock in terms of what's selling what's not, and what needs a little bit more attention. Sarah Eifermann: I think the same thing can be said for unnecessary assets. So equipment or tools or things that you've got sitting there that you're not using anymore as a business, but you invested money into them maybe when you first started and you can't bear to part with them, because it was hard-earned money that went. Trudi Cowan: From might just be, it was the first car that the business bought, but actually get used anymore because you bought newer ones, but you never traded it in. So it's still just sitting there. Well, that's worth cash flow to you. Sarah Eifermann: It's worth cash for staff, but it's also potentially it might be costing you money if there's registration on that car or insurance. If you're not using it, get rid of it. Use it or lose it. Trudi Cowan: Or make a plan to use it so that asset sitting there, is making you money rather than just sitting there. Sarah Eifermann: But you might need new assets, Trudi Cowan: You might need new assets and this is one that I love to have heated discussions with my clients about. He said, only spend what you need to, on that new asset. Do you really need the $75,000 used in your business to achieve what you need? Sarah Eifermann: Just going to get battered because of the type of business that you have. Trudi Cowan: Or is the $30,000 one more appropriate? Do you really need the brand new piece of equipment? Can you buy it secondhand, reconditioned? And for your stage of business is actually more appropriate for your use and for what you need. Sarah Eifermann: That is a debatable argument at the moment because we know the stock on new vehicles is very hard to get and secondhand vehicles are selling for more than new car stock. It's insane but it is happening. Trudi Cowan: It's not just about cars, you know, you've only had your laptop for 12 months do you really need to be going or buying a new one, just because the latest shiny model has come out or is that $3,000 that you don't really need to spend and could be invested into something else. Sarah Eifermann: Completely, so we have one more tip for this episode. Trudi Cowan: Invest any surplus cash that you do have because we're really hoping that you all have wonderful successful businesses, and do have a little bit of excess cash lying around. Don't just leave it sitting in your account, earning 0.00001% interest, put it in something a little better. Maybe that is just a savings account, or that's, you know, got a better interest rate. Maybe you've got a decent amount of cash that you can then be investing some other way. Sarah Eifermann: And maybe you need to seek financial advice to get the if you've got more money like just to make sure that you're doing the right thing with it and that's important, too. So invest in the financial advice, and then get the money doing, earning a return for you if you've got it. Trudi Cowan: Yes, definitely. We love it. We love cash in our business. Sarah Eifermann: So healthy cash flow management is fundamental to being successful in business. It really, I think that not having enough cash is one of the main stresses that every business owner really feels the pinch of. Trudi Cowan: It does and it's one of the biggest causes for businesses to fail. Sarah Eifermann: Yes, marriages to break down as well. Trudi Cowan: Is poor cash management and if it's not something you've ever spoken to your accountant about, go and talk to them about it and ask them to have a conversation about your cash flow. Whether they think that you're doing okay, or whether there's something that you should be improving in terms of your cash flow management. Sarah Eifermann: I do offer consultancy services that work with cash flow management as well and helping you work out where your cash flow is. So maybe it's your accountant is not the right person for you, or you maybe don't understand the way they explain things. Get in touch, and maybe just somebody else that's not them. explaining it a different way may make it all come together for you, more sense so that you can come out the other side and really get stuck into managing your books and being on top of your business, cash, and profit. Trudi Cowan: So here's to a big week of everybody reviewing their cash flow management. Sarah Eifermann: Absolutely because next week, we're actually talking about saving money. So it's probably the right one for you to spend your time this week doing. Trudi Cowan: Yes, so that you've got some money to save. Sarah Eifermann: Yes, thanks. All right. Speak to you then. Bye. Trudi Cowan: Bye. Announcer: Thanks for listening to this week's episode of Financial FOFU. We really appreciate you tuning in and hope that you have subscribed to our channel. I just wanted to let you all know that the information and material in our podcast and any supplementary and associated information available is for general purposes only. It should not be taken as constituting professional advice from us, the podcast owners, and our special guests. We recommend that you seek independent suitable advice that is specific to your unique circumstances. Thanks for tuning in. Hope to see you next week. Please use our link and send us any requests or feedback. We'd really appreciate it. Cheers.———————-
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DISCLAIMER- The information and material in this podcast, and supplementary and associated information available, is for general information only. It should not be taken as constituting professional advice from the podcast owners, and we recommend you seek independent suitable advice that is specific to your unique circumstances.