You’re a tradesman that may be starting out or maybe established in business. You know your trade in and out, your workmanship is second to none, but you’ve received little or no training when it comes to the business side of things. When cash flow is king, you’ll need to know how to combat and avoid cash flow issues.
We’ll cover off some of the challenges you’ll face in business and how you can combat and avoid cash flow issues.
- Not invoicing customers
One common issue we see with trades businesses is a large amount of cash held up because invoices haven’t gone out. Not invoicing customers promptly limits cashflow and ultimately stunts the growth of your business.
With the help of good accounting software such as Xero, invoice jobs as soon as they’re complete. You may be able to invoice in advance or at certain milestones depending on the scope of the project. Discuss when payment is due with your customer prior and ensure that it is clear on your invoice when payment is due.
In addition, we recommend implementing automatic invoice reminders. This reminds people the day after their invoice falls overdue. These can also prevent having to fall back on your debtor procedure.
- Slow paying customers
You know that as a tradesman needing to purchase supplies, pay contractors etc, you can’t afford to let overdue payments drag on. As one of the biggest challenges faced by trades businesses, it’s imperative to have a robust procedure in place to follow up payments regularly.
Here are a few ways to reduce the number of overdue invoices:
- Invoice straight away – the job will be fresh in their mind and so will the need to pay you
- If possible, invoice and collect payment on site
- Offer customers a range of payment methods – for example, not everyone prefers bank transfer
- Review your payment terms – If you are having an issue with late payers and have 30-day payment terms our suggestion would be to amend this to 7 days. This way if it is not paid within the 7 days you can follow your debtor procedure and possibly get payment before you would have usually with the 30-day payment terms period.
- Non-paying customers
There is now a portion of your slow-paying customers turning into non-paying customers and the pressure is mounting.
A good way to combat this issue is to have a strict “Debtor Follow Up Procedure”.
Here is a simple procedure:
- An email reminder when an invoice is 7 days overdue
- A phone call reminder at 14 days overdue with the mention that no further services/products will be provided until payment has been received
- A final letter sent via post and email when an invoice is 30 days overdue notifying the debt will be sent to a collection agency within 7 days
For a more in depth debt collection process see: Proven Debt Collection Process To Recover Debt
- Poorly managed books
The state of your books reflects your business, how it is running and performing. If your books are poorly kept, you may see your business running into issues.
It is common to outsource your bookkeeping to a professional to ensure you have an accurate overview of your business and how it is running and performing.
- Poor credit terms on both sides of the ledger
Another challenge tradie businesses face is poor credit management in relation to both accounts payable and accounts receivable. Poor credit management puts a tremendous amount of pressure on your cash flow.
We’ve seen tradies extend favourable terms to customers but then fail to manage them closely. Once contracts get bigger and accounts payable balances increase, so too the time to pay increases and before long, you’re owed tens of thousands of dollars across the board.
On the other side of the ledger, your business starts to grow and so do your contracts. You are now able to negotiate better terms that suit your business. This is great for your cash flow but you still need to make sure you keep track of the future payments that you will be required to make to avoid surprises and interruptions to your cash flow.
It doesn’t matter how big or small your business is and in what phase you’re in, you’ll need to ensure you have a legal set of credit terms to protect your business and your assets and that you enforce them.
You may find that some of the above points covered apply to your situation and you may have learnt something new to help your trades business combat and avoid cash flow issues. That’s great! We’re glad we could help.
If you need a little more help and advice to put your business on the right path we invite you to contact us to organise a time to meet with one of our business advisors contact us.