With half of small businesses going under in their first three years and poor cashflow being cited as one of the top causes, there’s no denying how critical it is to get it right. In part one of our two-part guide, we ask expert Tim Hoopmann and our SMEs how they do it.

According to the Australian Bureau of Statistics, about half of small businesses won’t make it past the three-year mark. Some have suggested that number is even higher, so when you think that of Australia’s 2.1 million businesses, 97 percent are deemed small business, that’s a lot of disruption and heartache.

In the last financial year, almost 80 percent of those going under were small businesses according to the Australian Securities and Investments Commission (ASIC). The figures replicated the results for the two previous financial years as small business continues to over-represent for all the wrong reasons.

So what goes wrong?

According to ASIC, “inadequate cash flow or high cash use” was cited as the main cause by 40 percent of businesses. It came in only second to poor strategic management (44 percent)

No cashflow. No business

Tim Hoopmann of Sydney’s Cornerstone Bookkeeping, who specialises in streamlining bookkeeping and financial processes for sole traders and small business, is an evangelist when it comes to cashflow.

“Businesses often look at their bank balance to judge how well it is going, whether it’s profitable. That’s not the full picture. You need to look at your cashflow,” he said.

“Cashflow is more like a window into how the business is doing today, and more importantly, tomorrow. It shouldn’t be confused with your profit and loss which is how your business has performed over the last month or year. They are two very different things.”

Key steps to manage cashflow better

1. Make a cashflow audit (and) projection

Each business has a unique cycle of highs and lows. It could be that your income is regulated by a product launch date or simply the calendar such as Sydney’s UNSW Bookshop which service 40,000 students at the start of each academic year or east coast surf shop chain Acquatique which is the epitome of the seasonal business.

Justin Bellwood is general manager and “fixer of problems” at Acquatique who own three surf shops in Nowra and Huskisson. He said, after 29 years in the business, they know the importance of cashflow planning.

Bellwood said their season begins in October and ramps up to Christmas. He said there’s “nervous November” where they wait to see what Christmas stock gets sold, and the season will run until the end of February.

He said gone are the days of selling t-shirts and boardies on the back of your range of surfboards. The modern surf shop is all about fashion.

He said planning that mix of inventory had to be spot on.

“We start with a margin we want to hit, estimate the sales required, then take out our costs such as rent, tax, and payroll,” Bellwood said.

“Once we set that, we just monitor it closely so there’s no blowout. We do a lot of advance reports and we can usually estimate within a range of 10 percent.”

At the other end of the business spectrum is Marcelo Soto, who recently opened the hugely-popular Cross Eatery in Sydney’s CBD.

For Soto, the biggest hit to cashflow is staff wages which account for 30 to 40 percent of outgoings so getting the balance right is paramount.

“You’ve got to have what you need to grow, and you may be overstaffed initially to allow that. For a new business like us, you are still not quite sure of how busy you are going to get. That fine tuning could go for a year,” he said.

Soto said there’s no shortage of information available to pinpoint where your cash is going.

“We know how much each dish costs to prepare. And if some of those ingredients shoot up in price, we have to absorb that and get the pick-up somewhere else. We need to do all this while keeping the food in line with the highest standards we have set for ourselves in terms of quality. We only use premium suppliers and our reputation is built on that.”

Hoopmann suggested getting as much clarity as you can. “Being aware of every cost to the business goes a long way to helping solve cashflow issues,” he said. “Knowing the impact will help you understand and improve cashflow management over the month or quarter.”

The key outgoings include:

  • Lease/rental
  • Inventory purchase
  • Wages
  • Loans
  • Motor vehicle expenses
  • Marketing, advertising
  • Fees (accountant, solicitor)
  • Income tax, GST
  • Insurance, superannuation

Useful tools:

Make a cash flow statement: Business.gov.au has a template you can download.

Find an accountant: You didn’t get into business to spend your time (and cashflow) as an accountant, so find one here.

2. Make it easy to get paid

Customers will often go to the business where it’s easiest to pay. We don’t suggest if you are a local sandwich shop, you accept every premium card under the sun and absorb the cost, but a reasonable surcharge is acceptable if the customer is going cashless.

Aside from face-to-face transactions, other ways to make it simple is to encourage direct debit or automate payments if they are regular customers. Or if you are issuing individual invoices, make it clear how they are to pay and include the essential details such as ABN, bank account details, and GST.

Hoopmann said Cornerstone practises what it preaches.

“We make it as painless as possible with a method that suits them … as automated as you can — the days of posting invoices are gone,” Hoopmann said.

“We send online, they see it online, and then click a button and pay online. There are lot of online invoicing tools available and you’ll get it into their hands quicker.”

He said Cornerstone do 75 percent of direct debit and offer a myriad of easy payment options such as eWAY or ezidebit.

With Melbourne’s Canning Meats, which went cashless in 2014, the method of payment was dictated by what they sold.

Despite the fact that about quarter of customers paid in cash, owner Sam Canning risked losing customers for want of better hygiene. He felt coins and notes were a petri dish of bacteria, and he could do without the time-consuming procedures for butchers to keep their hands clean when handling cash.

The added benefit was that transaction times were cut to seconds not minutes with Tap & Go, and having all payments recorded in real time eliminated errors such as short-changing or overcharging, and balancing the till at the end of the day was simple.

“I have at least 30 minutes extra in my day because I don’t have to do the daily cash run to the bank,” Canning said.

Useful tools:

How to create an invoice template: Find it here.

3. Update your technology

Every business needs a regular spring clean and technology should be near the top of the list. It could be your computer system or EFTPOS terminals that are outdated. A lot of innovations have been made in recent years, particularly with EFTPOS, such as faster transaction times, easier reconciliation with your POS system, which amount to better efficiencies and cashflow.

According to Soto, the innovations in technology have been “amazing” in the last five years where now there was “an app for everything”.

“I remember hearing from colleagues that when you’d open a business, you wouldn’t have a complete understanding of your cashflow for the first year,” Soto said.

“Where for us now, the numbers are there every day in front of you. You can see what you are making hourly.”

“Everything is linked back to Xero. We have Deputy for our staff scheduling, Kounta as our POS software, and Tyro as our EFTPOS. And we’re using the Tyro Smart Account for making our bill payments. It all saves me time.

“Through Deputy, we do all the scheduling, pays, and tally the hours. At the end of the week, I just go ‘approve’, ‘approve’, ‘approve’. The days of roster sheets are gone. Everyone gets emailed everything. My bookkeeper exports from Deputy into Xero which goes straight to pay.

“Cashflow is the number one thing you need to think about. We were fortunate that we hit the ground running and we had money coming in straight away. But with some businesses, it could be a year before they break even.”

For Bellwood, he uses workplace management software Time Target to organise staff.

“My word for 2016 is ‘efficiency’. What can we do better with what we have? With Time Target, staff do a finger vein scan when they come to work. They have an online portal they can access. The best growth is organic growth and good cashflow is central to that.”

Hoopmann is a great advocate for new cloud-based accounting software options such as Xero and QuickBooks Online.

“With these you can automate a lot of business tasks and generate reports quickly, helping you understand your position better,” he said.

“Being securely cloud-based, these systems allow you to access information from anywhere on any device. Accessing real-time financial data gives businesses greater control and allows better business decisions to be made.”

Useful tools:

Some of the popular software packages are: