Managing your working capital

Working capital is the money needed for day-to-day business operations and is often a measure of a business’s liquidity, efficiency and financial health.

To ensure your business has adequate working capital, the working capital cycle should be applied. The working capital cycle is the length of time from the purchase of inventory to the receipt of cash from customer sales.

The cycle comprises four elements: cash (funds available), creditors (accounts payable), inventory (stock on hand), and debtors (accounts receivable). Maintaining good cash flow requires control over each component. Ways to improve working capital:

Invoicing
To collect payments from debtors early, consider:
– establishing a credit policy
– invoicing early
– reducing payment terms
– stop supplying credit to debtors that do not pay
– following up on overdue accounts
– offering early settlement discounts

Inventory
Inventory can tie up a large sum of your working capital; reducing inventory through the just-in-time model can increase efficiency and eliminate waste. The just-in-time inventory model is beneficial as it allows for quick changes to customer needs and frees up working capital to better meet financial obligations.

Managing cash outflows
Managing the money you owe to creditors is just as important as managing your accounts receivable.

To ensure your cash outflow meets your obligations:
– consider early payment discounts
– prioritise suppliers
– ensure the accuracy of invoices before making a payment
– only make payments when they are due

Bad business habits

When you run your own business, it can be hard to step back and look at the big picture. Failing to do so, however, not only harms your business; it can also make it even harder to sell.

Whether it is failing to track cash flow or not investing correctly in key staff, there are many bad habits that business owners commonly make. Here are the top three:

Using the business as your personal ATM
A common business tax-minimisation strategy is to spend business earnings on personal expenses that are not directly related to the business. The idea behind this strategy is that reducing the earnings will make the business liable for a smaller tax bill at the end of the year. However, the strategy can create complications that cost more in the long run.

For example, when selling the business, the owner will need to convince buyers that the number of expenses claimed should be added back to profits since they are not ‘real expenses’.

Not making cash flow king
Many small businesses fail as a result of cash flow issues. Problems with cash flow can be caused by a variety of factors, such as poor debt collection, unfavourable terms negotiated with customers, lazy record-keeping or a lack of regular costing analysis. Failing to manage cash flow hinders an employer’s ability to pay employees and meet suppliers’ invoices. The business’s capacity to meet unexpected debt obligations can also be significantly reduced, resulting in missed opportunities and potentially forcing the closure of business at worst.

Coasting along
Far too many business owners neglect to spend enough time developing formal business, financial and operational plans; instead, they spend each day focusing on their short-term to-do list. These plans, however, are vital in determining whether all the owner’s work results in business growth or if they are gaining little return.

Particular objectives need to be mapped out to monitor and measure performance. This allows business owners to identify areas of reduced productivity or activities that generate lower-than-required returns and take appropriate action to rectify this.

Reducing your winter bills

When the winter season commences, you might notice a spike in your bills. Although, it is no surprise that additional heating and hot water adds up, you may be surprised at how you can reduce these costs with minimal effort.

Consider the following tips to reduce your winter bills and lessen your environmental impact:

Heating and electricity
Instead of turning up the dial on your heating, look to other ways of heating up without using gas or electricity. Simple changes such as dressing warmly, closing the doors of the rooms you are not using and using a door snake can help to avoid the use of unnecessary heating.

Water
You don’t need to make big changes to make a difference. Some small changes you can easily implement include taking shorter showers, turning off the tap when brushing your teeth and installing a dual flush for your toilet. Fixing your dripping taps and leaking toilets will also lower your water bill.

Appliances
Before purchasing new appliances, be sure to check the energy efficiency rating. Switching to energy efficient light bulbs can also reduce your electricity bills. Installing a water efficient shower head and only using the dishwasher and washing machine when full can help to save water. Switching off and unplugging appliances when they are not in use is a good habit to form.

How to spot a fake loan

When shopping around for a personal loan, it is wise to be conscious of any potential scammers that may try and offer you a deal that sounds too good to be true.

Though a loan may look legitimate from a first glance, there are various tell-tale signs to watch out for to spot a fraudulent loan.

When applying for a loan, be wary if your lender:
– does not evaluate your credit report before approving your loan
– calls or emails you to advise that you are a candidate for a loan
– asks for an initial fee to be wired to a local or international bank account
– offers a low-interest rate
– approves an amount that is higher than you require or applied for
– emails you from a personal email address (i.e., hotmail or gmail)
– sends correspondence using an email address where the company name is misspelt
– gives you an immediate deadline to accept the loan
– has not provided a legitimate address

It is essential to ensure the company you are dealing with is legitimate. Find their number from an independent source and then call them. Never call a number provided in an email as the scam artist may be impersonating a legitimate institution.

To be more adept at identifying a fraudulent loan and to avoid being scammed, never solely rely on the advice of a lender. It is always better to do independent research before you finalise your decision.

Should you use a personal loan?

A personal loan can come in handy if you need some extra cash to fund a purchase, but it may not always be your best option.

Before you sign away, you will need to understand how personal loans work and if they are appropriate for your circumstances.

A personal loan is when a person borrows a set amount of money over a time period, along with interest, fees and charges from a credit provider.

There are generally two types of loans: secured and unsecured. Secured loans are secured by an asset, i.e., a car or home, in the case you would default on the loan. These loans have lower interest rates as the asset could be sold if you cannot repay the loan.

Unsecured loans, on the other hand, are not secured by an asset and therefore generate higher interest rates. A credit provider has the ability to take you to court if you cannot repay the loan.

One of the first things you should check when deciding on a loan is the interest rate. You can calculate how much interest you will pay over the lifetime of the loan by multiplying the annual interest rate by the term of the loan. For example, if you are borrowing $5,000 with an annual interest of 3 per cent over 2 years, you would pay $300 in interest in total.

Another important consideration is fees and charges as these can vary substantially between credit providers. The fees and charges will depend on the amount of money borrowed.
If you plan on making additional payments, you should also check to see if there are any extra fees for doing so.

Before you commit to a loan, shop around for the best deal, ensure that you have read and understood the terms and conditions, and are confident you can make the repayments.

Tricks to save more money

Most people, at some stage or another, will need to save money. Whether it is for a large purchase such as a house deposit or money for a rainy day, similar savings principles apply.

Consider the following tips to boost your savings account:

Automate your savings
One of the easiest ways to get into a saving habit is to automate your savings when you get paid. Create an account that is separate from your everyday expenses such as bills and groceries and allocate a set amount to be transferred each payday to this savings account. Having the money in a separate account will help to avoid the temptation of spending your whole pay packet.

Hold onto small cash
Holding onto small cash, i.e., $5 dollar notes, can significantly add up over time. Challenge yourself to keep a hold of small notes or coins left over after running your errands or a night out; you might surprise yourself as to how much you can save with little to no effort.

Save extra sources of cash
Anytime you come across an extra source of money such as a raise, bonus or a tax return, consider banking it. If you have managed to get by on your salary or wage up until now, you can continue to live off the same amount and you will thank yourself later when you can afford that holiday or car, etc.

Managing risks associated with investing

Whenever or however you choose to invest, there will always be risk involved. Luckily, there are strategies you can adopt to manage this risk in the best way possible for you and your investment goals.

Unfortunately, volatility in financial markets can cause an investor to lose their confidence. The Australian Government has provided Australians with a number of tips on how to minimise the risks involved in investing, to ensure they remain confident and their investments stay strong.

Consider the following:

Set goals

Goal setting is particularly important in a volatile market. Without a plan in place, when the market drops, an individual can be quick to panic and pull their money out. Reacting like this can cause you to lose out, so ensuring you have a goal and a plan will help you handle these times, without losing your head.

Diversify

A profile that is diversified is much more secure in times of market volatility because it is less exposed to the negative impacts of a specific economic event. Investing in a number of different industry sectors, asset classes and even geographic locations will see your portfolio become more diversified.

Stay involved

Knowing what is going on with your investments is important, as a significant loss in one or more of your assets could cause your portfolio to become unbalanced and less secure. You should receive periodic transaction statements that indicate the value of your investments, as well as the fees and taxes paid. Analysing and responding to this will help you stay involved.

Look out for scams

When markets are volatile, investors are more vulnerable and this is the time that scammers will arise and try to take advantage of the situation. Many scammers catch people out by offering something that sounds too good to be true, by saying they are a representative of a well-known company when they aren’t, or when they contact you in a way that seems suspicious, like a random phone call or through social media. Scammers may offer you investment options that provide high and quick returns, tax free benefits, no risk or low risk investments or even a discount for investing early before a public float. Be weary of all of these. If you are interested, you should always say you need time to think about it and do your own research before committing.

Guidance

Financial advisors are there to offer you assistance and to help you make the best possible decisions for your investment portfolio. Find a professional that you feel confident with, and don’t hesitate to contact them for help and guidance.

Maximising your accounts receivable

Freeing up working capital can help businesses fund growth, reduce debt levels and lower costs. One way to improve working capital is by managing your accounts receivable.

Many businesses fall into the trap of poor accounts receivable management, for various reasons from extending credit to customers, to ignoring payments terms to guarantee a new sale. These behaviours and behaviours like these can quickly cause disastrous effects on your cash flow.

There are a number of strategies you can practice to improve your accounts receivable process, including:

Customer credit approval policies

One great strategy is to create a clear customer credit approval policy before entering into any business deals with a customer. By assigning credit limits, payment terms, discounts and return policies to specific customers, you are protecting yourself from getting caught out. Introduce a system to determine a new customer’s creditworthiness, such as background and credit history checks.

Criteria for approving or rejecting requests for credit

Reviewing your credit approval process is an essential component of business, as a customer’s financial situation may cause a change to warranting a reviewal of their credit terms.

Sound invoicing procedure

One of the necessary strategies to maximise accounts receivable is to establish a solid invoicing and billing procedure, as generating timely invoices is a major aspect of collecting account receivables on time. Do your research and create a strategy that works best logistically for your business; perhaps it includes a staff member taking on this role, or perhaps you will look for automated options. Sending electronic invoices is ideal as it fast tracks the process due to reduced delivery time.

Efficient collection process

Developing a collection process for all staff to follow will increase efficiency, ultimately resulting in improved management of accounts receivable. You can do this by training all staff on the necessary process for collecting money owed, and train them in how to deal with difficult or non-compliant customers. They should be aware of how to apply discounts, how to negotiate payment plans, and how these aspects should be sufficiently documented.

Cash flow tips to improve your business

Poor cash flow is one of the biggest reasons why small businesses fail.

A healthy cash flow allows you to operate your business free of hassle; allowing you to pay your staff and bills on time. Having enough working capital to meet your business’ needs can help you stay out of debt and in business.

Consider these three tips to improve your business’ cash flow:

Create a forecast
Predict your sales and outgoing expenses for the year. You may do this by looking at last year’s sales figures and adjust accordingly. When estimating inflow, account for GST rebates, tax refunds, additional equity added to the business via owners, government grants, loans paid back, etc. Calculating outflows means you need to factor in administrative and operative costs. Also, consider expenses such as buying new assets, ‘one off’ fees, loan repayments and so on.

Reduce overheads
Consider leasing major assets instead of purchasing them to avoid tying up money in assets that will depreciate over time. Look for ways to cut back on spending such as lowering electricity bills and seeking better deals on insurance and internet costs. You may choose to negotiate payment terms with your suppliers, for example, extending your time frame to pay quarterly.

Control your invoicing
Issue invoices on time and be prepared to follow up on them if you are taking cash flow seriously. Send the invoice separate from other documents and make sure it is sent to the right person. For speedy payments, make it easy for customers/clients to pay you by providing multiple payment options. Automate reminders in your accounting software to notify overdue customers.

Getting out of small business debt

Managing debt in your small business is essential in maintaining the financial health of your business as well as preventing bankruptcy.

Consider the following tips to ensure your small business debts do not spiral out of control:

Reshuffle or remove expenses
Reviewing your expenses is one of the first steps to take when tackling debt. Look at the costs you can cut out and find alternative solutions. Whether this means cancelling unnecessary subscriptions, getting rid of expensive systems or selling assets such as a company car. If you cannot completely cut out costs plan to delay them. For example, take the full amount of time to pay an invoice so you have some extra cash to pay for unexpected expenses.

Increase revenue
Consider incorporating low-cost marketing techniques to generate additional revenue. Create low-cost promotions, such as special discounts for loyal customers, coupons, limited-time sales or offering discount codes in your email marketing for subscribers. Look for opportunities for improvement within your business – there may be an underutilised area that could make more sales and needs heavier promotion.

Prioritise debts
Evaluate all of your debts and prioritise them according to the size of each debt and interest rates. Depending on the debt amount and what types of debt you have acquired, you could either choose to pay off the debt with the highest interest rate first or pay off the smallest debt first. Paying the smaller debts first may help psychologically as you may feel as though you are making progress. However, paying off debts with higher interest rates can help you save money on interest over the long run. Regardless of which option you choose, be sure to continue making the minimum repayments of all your debts.

Talk to creditors
Don’t be embarrassed to contact creditors to inform them of your situation. Letting your creditors know your financial situation may put you in a better position to negotiate payment terms and conditions. For instance, if you have debt through a bank you may be able to arrange a hardship plan or consolidate your loans into one single monthly payment and so on.