Episode 7: Small business cashflow 101: How to manage your money and avoid mistakes

In this episode, Mia sits down with Catarina Santini, director of CS Accounting to discuss where small businesses usually go wrong with their cash flow systems, and what they can do to rectify this. Later on, Olivia Thwaites, founder and director of Green Hip Workwear joins Mia to share her own experience with both cash flow challenges and wins. 

Transcript

Mia:

Cash flow. It's always been one of the biggest hurdles for anyone running a small business. But right now getting that money in the door feels harder than ever.

Between high operating costs, customers tightening their purse strings and those frustratingly late payments, small business owners are obviously going through it right now. And obviously just getting the cash in hand is only half the battle. Then you have to organise it, plan for what's ahead, make sure you don't run dry too quickly, et cetera, et cetera. It's a huge way to carry, especially when you're just starting out. In this episode of The Small Biz Fix, we're gonna go straight to the heart of the matter.

Where do small business owners typically go wrong when it comes to cash flow management? We're gonna hear from a founder with 15 years in the game to unpack her own cash flow struggles and also how she's successfully tackled them along the way. But first, we're joined by accountant, Catarina Santini. Cat's the founder of CS Accounting, which is a firm specializing in small businesses. And she's out here talking about cash flow to small business owners every single day.

Cat, welcome to the show. Let's start with the very beginning. What are the biggest, most common mistakes that you see small business owners making when it comes to actually getting money into the business in the first place? 

Catarina:

I guess there's a few that I see and that's like not pricing properly. Many business owners undercharge because they fear losing clients or they try and benchmark against competitors instead of working out their actual cost from the beginning. Another one would be late payments from customers. Relying on clients to pay on time without, it helps to manage your cash flow quite consistently.

And lastly would be confusing profit with cash. People always get this one a little bit muddled up. They say, you're saying my profit is this thing but I've only got this much money in the bank or vice versa and so yeah they get those two a little bit confused.

Mia:

And let's maybe talk about pricing first. How can business owners make sure that they're charging enough, not only to cover costs, but also just to thrive and survive themselves?

Catarina:

I like to work from the bottom up. So I like to work out what the costs are. So the direct, the overheads and any hidden costs and then add a margin to ensure sustainability. I also don't like to rely on what everybody else is doing. That's one thing that people like to just go, yep, this person is doing this or that business is doing that. That doesn't necessarily reflect your personal circumstances. So be wise when you are trying to benchmark against other competitors. 

So yeah, working from the bottom up, working out what your costs are, also working out factoring in things like super and tax and how much money you want to take home at the end of the day. That's really important to factor that in when you are working out your pricing.

Mia:

Out of interest, is this something that you work with your clients with and is that something that a small business owner can expect their accountant to help them with or is that the job of another professional maybe?

Catarina:

No, absolutely that's the job of the accountant. Definitely I actually had a client in this morning looking to start a small business and it was actually great because we had these conversations and we were able to talk about how we need to have a few meetings so we can manage and we can work out what are packages they were going to offer and what pricing they were going to do so that they could take home a reasonable amount and justify why they're starting this small business.

Mia:

Yeah, yeah, yeah. And I've heard from some small business owners that pricing can be quite an emotional thing, right? Some small business owners might feel like, how can I justify charging this much, right? Like, am I really worth that much? Yeah, is that something that we see a lot? And how have you seen people overcome that?

Catarina:

Yeah, absolutely. And people get it wrong from, not always, but people do get it wrong. And then they're trying to back, like back swim and try and figure it out afterwards. So it's just like this conversation I had this morning, that they came to me with what they thought their pricing should be. And I said, okay, let's factor in this, this and this. And they're like, my pricing needs to be a lot higher than that. And I go, yes, it does. So we were able to have those conversations before the packages were out, before the pricing was released, which was great.

But in a lot of circumstances, business owners or people going into business for the first time, they go ahead and put their pricing out. And then a few months later, they're like, I'm not even making that much money, or it's all going to the tax office, or I'm not able to draw enough home, or they have to then double their prices or put up their prices at a rapid rate, which then leaves them the chance to lose clients because they're increasing their prices so quickly.

Mia:

So ideally you'd be doing this from the beginning but for a lot of people they're already quite far along in their business journey when they realize, my pricing maybe isn't quite right yet. And how do you work with those sorts of clients? You know, is there a way to kind of introduce that into your business in a way that means that you don't lose your customers?

Catarina:

Absolutely and it's important that we are reviewing our prices at least every 6 to 12 months anyway. So I would be increasing prices as you go. Some people do it, there's two methods. You could just increase your prices by a substantial amount first up and that's that and then deal with the fact that you're going to lose clients along the way. Others like to have like I guess the old and the new clients. So new clients will go on the new pricing packages and then old clients would then slowly catch up to those new pricing as they go over a number of years, but it will take some time. So it's just a matter of working out which method you're going to go with. There's obviously other ways you can do it, but that's how I've been managing it with my clients.

Mia:

And moving on to the other end of the spectrum, when a client is supposed to pay you, you've set the invoice, say, and nothing. Late payments, I know it's a big cashflow issue for small business owners. How can you minimise the impact of late payments on your business?

Catarina:

I think it's important to have your terms and conditions up from the beginning. So if clients understand and they know and they sign off on those terms and conditions, then they know exactly what is expected of them when it comes to the contract or the invoices. Another thing that people do is give early payment discounts. That helps, I guess, encourage people to pay early or they have late fees. So if they're paying late, then they're going to get an extra fee.

However, a lot of software like Xero allows you to have accounting, like having reminders for your invoices, which is a great way of getting those payments come through the door. Lastly, I would suggest that you make it as easy as possible to pay. I'm not sure about you, but like when I get an invoice and it's on my phone and I can do like Apple Pay or Google Pay, I just pay it. It just makes it so much easier. But if I have to go into my bank and enter the BSB and account number, it's a lot harder.

There's a lot more that you need to be looking at the computer, making sure you've got the numbers right and all of those sorts of things. So the more payment services and payment ways that you can make for the client, the better.

Mia:

Yeah, that's really interesting. And I know I've heard from talking to small business owners about chasing a late payment maybe. Having an automatic of set up can kind of take some of the emotion and friction out of that. If you're trying to chase somebody up like, sorry, it was my payment provider that sent you that email. It wasn't me demanding money or whatever.

Catarina:

Absolutely and that's what you can do with these reminders and there is an auto pay feature that is on zero invoices as well so if it's like a subscription base you can just click on auto pay and it direct debits the money every invoice on the due date which is another thing that takes out the barrier of getting paid late.

Mia:

And look, sometimes businesses will generate a strong revenue but still struggle with profitability and cash flow, right? What factors usually lie behind this gap and how can owners improve their margins?

Catarina:

I guess some of the factors can be that revenue can be in and away with by overheads or inefficiencies. They could be selling lots of low margin work, which still leaves little surplus. Rapid expansions or growth can often see a lot of upfront spending before the revenue can catch up. And then the cash timing, like I guess when you're invoicing jobs and then when you're receiving the money can delay depending on, you know, debtors and getting paid on time. So what you want to do is you really want to monitor your margins quite closely, adjust pricing regularly and control your costs while ensuring cash inflow matches your commitments that you've got.

Mia:

And do you have any examples of say clients that you've worked with where they've really managed to improve their margins quite significantly? You know, maybe some key actions that are maybe relatively small but have really improved things for a business?

Catarina:

Absolutely, we've had a lot of clients who have good strong revenue like you've mentioned but we've just enhanced like we've changed their credit like their terms of payment from 14 days to seven days and that has helped greatly. We've also adjusted any commitments that they've got whether it be loans to be on a more regular basis but a smaller amount so that it's a little bit more consistent but it's also not draining the cash flow with bulky payments.

Mia:

And speaking of loans, when is taking a loan out a smart move to ease cash flow pressure?

Catarina:

I guess it can be different for every business owner. It is always different depending on what's going on in the business and what you're taking out the loans. They shouldn't be a band-aid, that's one thing. They shouldn't be to fix underlying problems or under pricing or anything like that. So the things we've talked about already, we don't want a loan to fix that problem. Our loan should be there to, I guess, fund some growth or to protect working capital so you can kind of work towards growing the business. So a loan should be used for those purposes first and foremost. And we also want to make sure that whatever asset, if you are buying an asset with that loan, is going to generate further growth and further revenue within the business.

And can you manage those loan repayments down the track? So some clients, when they want to buy a new piece of equipment or a vehicle, what we do is we actually build up a bit of an account with three to six months worth of payments for that equipment so that they've got that there as a buffer as well, ready to pay. And just also, it's a bit of a practice, so if they know how much the loan repayments are going to be, we say, put that money away for three to six months. And if they can manage that, then we know that we can get that finance as well.

Mia:

And so once business owners have done what they can to remove certain cash flow barriers, how can they then plan ahead to make sure that they don't run out of cash?

Catarina:

Cash flow budgets are always one of my favourite things to do. So, you can do a cash flow budget for you know, three, six, 12 months, whatever you want. We recommend having them and then doing them over also a five year trend as well so that we can kind of make future decisions based on the cash flow. We also suggest that you maintain a buffer account or an emergency fund to cushion any unexpected dips in cash flow and set aside a percentage to make sure that you are putting money aside for things like tax, super savings and for some opportunity to reinvest in the business as well.

Mia:

And I assume this is something you do with your accountant. What role should an accountant play in a business? What sort of things should business owners expect from the partnership with their accountant?

Catarina:

I see an accountant and client relationship as a bit of a, it's a long term relationship. We're invested in your business. We're someone who you can rely on to ask questions. You see us, you know, four to six times a year. We help you interpret the numbers of your tax return, your BASes and your month to month numbers and anticipate any issues that will arise. We also strategise and to provide advice on that pricing, the structuring and any future decisions. We also like to help you set up any systems that monitor cash flow and highlight risks early. Business owners should expect proactive insights and tools to manage cash, not just at the end of the year. Reports.

Mia:

Can a business owner kind of just hand everything over to their account and be like, okay, you deal with that and go stick their head in the sand? Like how involved do you need to be? know, should it be kind of an educational relationship as well?

Catarina:

In my opinion, very much so. If you kind of hand everything over to your accountant and stick your head in the sand, you're not going to move forward. You're not going to understand what your business is doing and you're not going to have that opportunity for growth or for your business to thrive because you're just being reactive, not proactive.

Mia:

What would you recommend to business owners or maybe someone starting a business for the first time when it comes to seeking out an accountant? How do you find someone that works for you and how do you make sure that that relationship is really going to be productive and help you grow your business?

Catarina:

I would suggest that you get a few quotes, get a few opinions, go and see a couple and see how you feel, how you feel when you talk to them. Some people find it hard when you talk to an accountant, they say that we're like hard to talk to or they're a bit sticky or something like that. And what you need to do is, I don't know, I find it when you have a conversation with someone, you can generally tell if you can get along with them or how they work. And I think it's important to have that conversation with an accountant early on and speak to a few different ones, see what you like and see who sits well with you because at the end of the day, like I said, it's going to be a long term relationship that you really need to have some trust in the other person. 

So if you don't feel comfortable with the one that you've got now, then have a look and see who you do feel comfortable with. And that relationship needs to be strong so that you can trust them and that you can rely on them and you don't feel silly asking those tricky questions because at the end of the day, you're not supposed to know those answers, we are. So you need to be able to ask those questions again and again.

Mia:

Let's talk kind of long-term trends to sort of finish off with. Given the tough few years that many small businesses have had, how do you see business owners approaching cash flow differently now compared to before?

Catarina;

I think they're a little bit more conservative. Owners are quick to build buffers and avoid over extension. They've got stronger systems in place. Technology is proving to be a great source in this area. There's more automation, there's more digital invoicing, there's more ways of making payment, which makes it great and easy for things to happen faster. And a lot of people are being a lot more proactive.

They want to know their numbers, they're forecasting, they're looking at scenarios, they're planning more often, which is great to see. Instead of chasing that top line growth, many are prioritising sustainable margins and stable cash flows, rather than, yeah, again, looking at that top line again.

Mia:

Now we've spoken to an accountant about where small business owners commonly go wrong with cash flow, let's chat to someone who's spent 15 years running a successful business in the retail sector. Olivia Thwaites is the owner of GreenHip Workwear. GreenHip started in 2010 when Liv stepped up to fill a gap in the market for workwear shaped to women's bodies. Women in trades have been flocking to her shop ever since, but the journey hasn't been without challenges, especially on the cash flow side.

Now, Liv, 15 years is a long time to be running a business. Looking back, what have been some of the biggest cash flow mistakes that you've made?

Liv:

Being able to have accurate numbers is like the priority. And for me, I identified that that wasn't happening. I had a bookkeeper who I really trusted. And then it was when we started working with new accountants that realised that, my gosh, this is a mess. So really being able to focus and really pinpointing, okay, we need accurate numbers to be able to make sound business decisions. I, as a business owner, can't make the right decisions if I'm making decisions off the wrong numbers. So that is like so fundamentally important. Yeah.

Mia:

And what was going on with the numbers? What numbers were not accurate and what was going on there?

Liv:

Yeah, well, for starters, our balance sheet wasn't quite adding up properly because the inventory, the system wasn't being used properly. So, you know, I think you know all the different mechanisms of, you know, with accounting, when it comes to receivables and payables and inventory on hand, they all need to be 100% accurate.

And they just weren't being entered into the system properly. So the new system wasn't being used the right way either. So, you know, quite a lot of our commercial invoices weren't actually being authorised.

So, and being able to overview the people that you're working with and checking on their work. And I think, you know, if you've got a bookkeeper and they're not asking questions, there's something wrong. You know, because there's always questions, you know, and there is human error that happens, you know, that's just life and you've just got to learn from it. But yeah, you should be getting questions from your bookkeeper and your accountant.

If there's no questions, it's like, hmm, okay. Is everything getting done here?

Mia:

How did you overcome all of these problems and really start to get the actual accurate numbers?

Liv:

So I installed some really strict financial control measures and we put them in place. We bought all the bookkeeping in-house because I've got this amazing sales and business administration manager who has that as background. So she was working with the bookkeeper, but the bookkeeper was overruling things that she was saying. So we just bought it all back in-house.

So that was number one. And now we have finance Fridays, which is really good fun. I actually really love it because this is where Barb, who does the accounts receivable and payable can ask me questions and we can double down, really get into the numbers and understand, okay, is this all accurate? Is it all reconciling? So that was number one. Number two was we have weekly, fortnightly and monthly checkpoints. We've got a checklist where things have to be done and daily actually as well. So by the end of the month, when we're doing end of month, there shouldn't be a big rush because it's like we've been doing it throughout the month. 

Then we also have locked in a meeting with our accountant, our new accountant who's amazing. And we meet at the beginning of the next month. And we talk through end of month, year to date. So then me as a business owner, I know that the data that I'm looking at is 100% accurate and I can make sound business decisions based on the numbers. Whereas before I was making business decisions on incorrect numbers, incorrect data.

And so when you ask that question, know, you've you're like, hang on, why, why do I not have any money in the bank account? Yeah, that's usually probably why, because the budget isn't being utilised properly. So you're overspending, you're not hitting your sales targets. And then and then you've got incorrect data as well. So really, you're flying blind

Mia:

And can you describe to me a few of the things that are on those checklists that you have like maybe your daily one, your weekly one, what is on there, what are you doing in those times?

Liv:

So the daily one for Bob is she's reconciling any expenses or revenue that's coming in. She is also reconciling some of the, the like the credit card payments from our website. And she's also sent checking part of the reason as well why it's great to have end of day reconciliations for money receipted is for our stockists who have payment terms. You know, if they're sort of delaying in payment, then we can give them a little nudge and say hey guys just you know where you know we need you to pay your bill so That way we know at the end of day. Okay. This person hasn't paid will follow up tomorrow and so forth So well bar will do that for me, so that's the daily.

The weekly is any invoices that maybe payments that I've made that Barb needs to then be able to put into our accounting system because we always have all the invoices uploaded into there. So if you need to find something, you can just click on it and it pops up. So that's weekly. Any bank statements that she needs from me or any other data really, or we might hone into, this week, who owes us money or there'll be just certain topics that'll be on my mind and I'll be like, okay, I just want to look at this with you. So that's really cool. 

And then mid month is also bank statements. That's the main one there. Just sort of downloading bank statements. So then Barb can reconcile those then end of month is the whole, the whole gambit sort of looking at, you know, the payroll superannuation, bas, cause we do monthly bas now. and actually another great hack that I've just started using now is that we, cause we're importing goods. We're actually, we're using the deferred GST scheme. So we don't have to pay the GST on imports. So that's been a huge cashflow win actually of late, because my imports are getting really large.

Yeah. So end of month is just, know, the whole lot. And then, and then what we have is a shared document with our accountant. So we share documents and we actually have a checklist. So we've got a big checklist of dot points and all the different categories, but then we've got an Excel sheet, which has the reconciliations for each sort of major bank account and bank loan or whatever it is. So then we can give that to the account for them to review and then they will publish the reconciliation report so then I can review them. Yeah, so it's working really well and I'm loving it and it's really good. 

Mia:

That's so good. Are you a numbers person Liv, like naturally, or is this something you've sort of had to grow into love?

Liv:

Yeah, no, I'm a numbers person. love numbers. I think they're great. Yeah.

Mia:

Another thing that we talked about in the first half of this episode, which you brought up was getting paid on time. And you said that this is something that you look at actually on a daily basis, like, you know, who owes you money? When is that coming? How are you getting it? How do you ensure that you actually get paid on time and discourage those late payments or unpaid invoices?

Liv:

I suppose it's just about building really good relationships, you know, and having those good, hard conversations. And thankfully, Barb is great at that, you know, and she's quite happy to pick up the phone and have a conversation with whoever's owing us money and checking in, see if they're okay. You know, if they want to pay weekly or whatever.

But you know, we're a small business, so you know, we need to get paid. So I think really having that strong relationship also now it's very rarely does it happen now because no one wants to get a phone call from Barb anymore. So it's about that consistency, you know, they're like, okay, we, are great here. You know, we've got to pay them. and so, yeah, so that's really, yeah, it's about building the relationship really. Yeah. Yeah.

Mia:

Wow, and what's Barb's secret? Why does nobody want to get a phone call from Barb?

Liv:

Well, she's consistent, you know, she's actually going to as soon as that if it's overdue, she'll reach out and just send an email, you know, so first it'll be a statement. And then it'll be a follow up call in a day or two if there's no payment made. So, yeah, so, but yeah, she's not having to make nearly as many calls now because everyone's just paying on time, which is great. Yeah. Yeah, it's really good.

Mia:

Mm, that's fantastic. I've heard mixed things about this. I know some business owners prefer to have those payment reminders automated to take that human element out of it. Yeah, OK.

Liv:

Yes, we do have that too. Yeah, we do have that too, but it's when it gets to the point where they, yeah, they've had too many reminders. So now it's, it's at a point that actually- at the end of month, Barb sends statements as well, cause most of our stores are at the end of month or 30 days on invoice date. So, yeah, she'd send, she'd send the statements out and then usually people pay, but it's only if they're overdue. There's a follow-up.Mia:

And I'd imagine at that point it's important to approach it from more of a human perspective like, you know, is there anything going wrong? Can we make it easier for you? It sounds like that's what Barb does when she rings up these people.

Liv:

That's right. Absolutely. Yeah, absolutely. And it's it you're right. It's a it's a human element. You've got a relationship here and you want to sustain a really great relationship with your, you know, key customers. 

Mia:

A question I was actually going to ask you earlier on the topic of selling is pricing. Obviously, you're a product-based business, have you ever had any problems with the pricing of your products? Have you had to adjust those over the years to keep up with costs? How has that worked over the journey?

Liv:

Yes, yeah, absolutely. think that's been a big learning curve as well. And once again, with the modeling, which I've had for years, really understanding what your landed costs are, what kind of margin you need to be giving the wholesalers, what they want, but also what margin you need to get overall as well is really important.

I think one of the mistakes I did was I didn't put my price up incrementally to my wholesalers. So now I've got a policy that every year we review our prices, check out our competitors, what price they are, but also have a really good look at, okay, what has increased. And as we know, the last couple of years have been a lot of increases, especially with freight and importing and just logistical postage and handling and so forth. And also labor, that's probably the biggest increase in superannuation. over the years I've been really, about a good five years now, really focusing on looking at prices every year and having to, it's not fun when you're putting your price up, but you know, at the end of the day, it's, it's got to be profitable. That's what the business focus has to be. so, and everyone does it. So, you know, so should we.

Mia:

And how do you communicate a price increase to your customers?

Liv:

Yeah. So with our, with online, there's no real communication there, but with our wholesalers, we always give them at least a month's notice. So some contracts there, they have different rules. So you just abide by those rules. So yeah, it's just an email and then phone calls when you're your sales visits and so forth. Having those conversations. Yeah. But usually they're quite happy if the RP is going up as well, then they're still getting a good margin. So that's, that's good.

Mia:

Let's move on to the recent times for your business. When we were preparing for this episode, you mentioned that you faced a challenge recently of generating enough working capital to scale up the business to the next level. What strategies have you been using to help you free up some cash?

Liv:

So there's quite a few there. I think those strict financial control measures have really helped as well. But look, I have been able to negotiate with my manufacturer to help release some goods with different trading terms. I was actually the APAC winner for the grant challenge for Lyft Women back in May.

And part of that amazing program that I was part of. So it taught us a lot about how to look after, you know, found a health and well-being pitching, what it means to pitch for investors or how to sort of maintain your 100 % ownership. So there was a pitch night and I won that pitch night.

So I was able to use that. I created another presentation for my manufacturers. They come to visit me every year, which is awesome. And yeah, so I was able to really showcase to them that this is a new phase in the business that we're growing. And yet they've backed me and the business and really believe in what we're doing. So that was awesome. We also restructured the business during the economic downturn. We were hit a little bit hard there. So I really had to once again, look at the hard numbers and just focus on, well, okay, you know, this is how much labor I'm spending. This is how much costs of goods. And then you've got operating costs as well. So doing a restructure there was, was really important.

And really understanding the numbers, you know, where are the costs? What's the key focus? How can we double down on our core, you know, tapping back into what our core purpose is, and yeah, and how can we grow through this as well? So, yeah, I think, I think just really making sure as well that I was working with a team who were serving me as a business owner. So just really refocusing at that as well and working out what's working, what's not, restructuring and then, okay, let's go, let's grow.

Mia:

You mentioned to me as well before we recorded this that you've put into place some new forecasting and budgeting measures, is that correct? 

Liv:

Yeah, that's correct. Absolutely.

Mia:

And what changed from how you were doing things before?

Liv:

Good question. What changed? I think making the financials a key focus has been a big shift for me and understanding how powerful that is. But I think too, like what we talked about earlier, when it's not your strengths, you've got to understand that you're growing through this. You're having to learn how to read a balance sheet, how to read a P&L, how to understand your gross profit margin and what's, what are key components that are really important. So obviously the gross profit margin is really important than your operational costs. So then to be able to map it out, the great thing about a budget and a forecast is that you've got goals, you know, and you've got guidelines. And when you've got people coming to you, which happens as you grow, you've got people saying, Hey, here's this great opportunity. How about this? How about that? It's like, well, hang on. 

How much is that going to cost? Is that going to help grow the business or should I just focus on, you know, so it's like, no, let's focus on the budget. Let's focus on what our next 12 month plan is two year, three year, five year plan is, is that part of my plan? No, it's not. Okay. Sorry. No. So it's about being really clear about what earns you money, what you love to do, because you've got to keep the joy in there. That's so important. And that's me selling. I love to sell. And to see the joy on women's faces when they actually put on clothes that fit them. And then just be able to, I suppose you can have conviction, Mia. Like when you've got a budget and a forecast, you know, these are the goals. Let's go get them. And just that's your focus.

Mia:

To wrap up, is there anything, any sort of a lesson you'd like to share with us about cash flow that you've learned along a business journey or any piece of knowledge that you'd really like to impart on our audience about cash flow management?

Liv:

Yeah, yeah, absolutely. I think, you know, really fundamentally you have to prioritise your finances and make sure that everything is accurate, 100% accurate. So then also through that is building strong relationships with your team who help you with your finances. So your accountant. Find an accountant that you feel okay to ask questions because you know, no question should be a dumb, no question is a dumb question, you know. And also I think for me, I've really learned that when you're okay, if you make a mistake or you've done something wrong or you didn't quite catch something, you know, turn it into- it's a lesson. You know, it's not don't beat yourself up about it because how are you to know what you don't know? 

So what I always like to do even now with my new accountant is ask, is there anything else I need to know? Or was everything okay? Is there any other data you need? Or how did you think this month went? What do you think we can do to help make it more profitable? having those key factors of having a strong team around you where you feel safe enough to ask those questions then you'll just know that, yep, we're all good onwards and upwards. Let's just go scale and grow this business.