What is Cash Flow?
Cash flow is the amount of money transferred in and out of a business. Often, a lot of tradespeople overlook the importance of keeping a sharp eye on their cash flow – this is a dangerous trait! Small businesses will often feel the brunt of poor cash flow more than other business types because there are less resources to fall back on. Your cash flow should be managed in such a way that you are increasing your profitability – not losing out.
Common issues we see
Working through a quotation/invoicing system, we find that cash flow for Tradies often suffers when there is late payment, undefined payment terms and an older methodology to bookkeeping. These problems can generally be alleviated once cloud-based accounting software is implemented to the business. Taking a business off paper to a digital landscape not only streamlines the way you do your business accounting but will save you a LOT of time in the long run.
Why managing your cash flow when you’re a Tradie is especially important
As a Tradie, your livelihood isn’t only reliant on the jobs completed, you have a few other things on your plate too! Like completing quotes, managing your marketing, responding to enquiries, ordering supplies and doing your accounting (click here if you don’t want to focus your time on accounting any more). This list goes on and on, but the point being made here is you have a lot of financial responsibility that can’t be hindered to poor cash flow.
Here are some though-starters on how you can have some more control over your cash flow.
- Make sure your business and personal expenses are split
If you don’t have a business account for all business income and expenses, open one now! Not only does this make your life easier come tax time, but you won’t be polluted with other transactions that aren’t business related. The best part is, you won’t need to guess your financial position every time you check your accounts.
- Set budgets
Setting monthly or quarterly budgets for the different expense types in your business will help you stick to the grand plan. Sticking to your defined budget will give you a better perspective of your room-to-move in spend and what is/isn’t working – this can always be re-evaluated.
- Use the invoicing feature in your accounting software
The invoicing feature of your accounting software will feed through live updates and invoice payment status. If an invoice hasn’t been paid, system notifications and reminders are automatically sent to the recipient to prompt payment, following up on your behalf (no more awkward emails asking for payment).
- Re-evaluate your payment terms
The longer your payment terms, the less likely you’re going to be paid before the due date. By lessening your payment terms to 14 days, you not only add a sense of urgency, but you don’t allow your customer to forget about your invoice (especially with your invoice notifications). Shortening this pay period also means you won’t forget about this payment either if you don’t use accounting software. The last thing you want to do is focus time and energy on a job completed a month ago.Your invoices should outline your payment terms clearly with no convoluted terminology or excess text. Consider offering different payment methods. By offering a variety of different payment options, you’re meeting the convenience needs of your customer.
You’ll find that a lot of your time will be spent doing general business accounting and bookkeeping (time which could be spent completing more job). Work smarter not harder – take advantage of what software and resources are available to you.
If you feel like you need a little more assistance in improving your cash flow, TRAX Tradie Tax offers free phone consultations. We’ll chat about your business in more detail to see how we can help you. Not interested in accountancy packages? We can look after your tax returns including prior year returns. Book a zero-obligation phone call with Tess, TRAX Senior Partner, here.