Understand your business payment cycle
Rohen Burton, Chief Financial Officer of Fit n Fast suggests, “Cash flow projections are most commonly prepared monthly. However, not all payment cycles are monthly. For example:
• Billing might be weekly or fortnightly
• Wages can be fortnightly and/or monthly
• Rent is usually paid a couple of days in advance
• You may have quarterly charges
Even if you are projecting a profitable month, the timing of payments at different times during the month may result in a cash outflow that you will need to cover. Consider setting up an overdraft facility with the bank for these situations.
Keep Track of Your Payment Cycle Today
Business is all about having a healthy payment schedule to your debtors and suppliers followed closely by an even healthier payment schedule from your gym members. Ideally, business owners should keep their debt low until they have enough cash resources to keep their business running smoothly, even during bad collection season (knock on wood). There are also other ways to minimize sabotaging your payment cycle, such as:
- Reviewing your account statements regularly – this minimizes accounting errors and allows you to truly keep track of your cash flow situation, inclusive of who’s been paying you, who owes you and amounts you need to pay back in debt to others.
- Ensuring that all your payment due dates are after your cash in-flow date – Why make payment for all your bills on the day when your cash flow resources are at its lowest? See if you can negotiate payment terms with your vendors for a happier business relationship.
- Setting up automatic monthly payments – Once you are sure that you have sufficient funds in your bank account to pay off your suppliers consistently, consider establishing monthly transfers from your bank account to your suppliers. This will prevent you from overspending your cash before all the bills are paid for that month.
You may also enjoy reading 4 Cash Flow Management Tools for Your Business