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One simple strategy when customers won’t pay you

By on October 21, 2010 in Cashflow

Many business owners have experienced the disappointment of supplying products and services and then not being paid. Not only is it frustrating, but very painful financially.

So what’s one simple thing that you can do to alleviate this situation?

Do a deal with the customer to pay you small amounts on a regular basis.

This is what the tax department will do with you,
This is what a bank will do with you and
It is exactly the same strategy you can use with your customers who are finding it difficult to pay.

If they completely stone wall you by avoiding paying anything the outstanding account sits around ‘like a bad smell’.

If you can get a small amount being paid regularly it is amazing how over time the amount diminishes and you get your money back.

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How to avoid your business being shut down in a cash flow crisis

By on September 30, 2010 in Cashflow

Have you ever run out of money in your business and still had bills to pay?

This seems to be a very common problem for business owners when the timing of money coming in and money going out doesn’t seem to match.

When this happens most business owners do one of two things.

  1. Tip in money of their own to solve the situation
  2. Ring all their customers and ask for money

BUT there is actually a more important thing to do if you’re in a product style business.

Ring your suppliers!

Let them know that you have a cash flow issue. Don’t wait for them to ring you because by then you will have lost some goodwill with them.

Keeping your supply lines open is critical because without them you may as well shut the doors and give up.

If you’re to keep trading you must keep your trade accounts open because your business can produce the money to trade its way out.

That’s the least painful way out of a cash flow crisis!!

What’s your experience on this?

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3 easy steps to decrease debt in your business

By on September 16, 2010 in Cashflow

Many people get into debt in their business before they even open the doors and then it becomes a long hard struggle to recover and become successful.

My three easy steps will ensure that you start off correctly and then continue to accumulate strong cash flow and therefore decrease any debt you have in your business.

The three easy steps are:

  1. Make sure you have sufficient equity in your business before you start

    This means that you need to be putting in some CASH of your own and avoid starting your business with a loan from the bank as the only money to start with.

    It is much easier to continue working a job and save some equity so that you’re not overwhelmed from day one of your business by too much debt.

  2. Make sure you make profit AFTER tax

    If you are trying to avoid paying tax at the same time as growing your business you run the risk of making no profit and then the growth in your business must be funded by an increase in debt.

    Ensure you make good profit AFTER paying yourself a market wage AND paying the correct amount of tax

  3. Make sure you get paid by your customers

    Many small business owners make reasonable profit by selling to large businesses that have long payment terms.

    Others simply sell to small businesses that can’t pay because they’re not making profit.

    In both of these cases you will find that the accounts receivable can grow quite quickly and this again will need to be funded by more debt.

    Negotiating good terms and then getting your customers to stick to those terms is key to decreasing the debt in your business

What’s your story regarding debt in your business?

Have you been caught owing a lot of money and been stressed as a result?

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What the heck is a balance sheet all about and why it doesn’t make sense?

By on March 6, 2009 in Management

Lots of people get confused by balance sheets because they have no idea what they’re meant to represent.

Have you ever done a project? What was more important; The project milestones or the project plan?

When you compare this to financial accounts, the milestones are balance sheets and the plan is the profit and loss account.

So you can see that a balance sheet shows you where you’ve got up to. It shows you what you’ve accumulated in your business.

So why don’t they make sense to most people? Because accountants often prepare them using the wrong format.

You may have seen a balance sheet that shows; Assets minus liabilities equals Equity.

This is the most common form of balance sheet and also the most unhelpful in the 21st Century.

Here’s how we do balance sheets in the 21st Century.
Working Capital Plus Fixed Capital equals Debt plus Equity.

Think about buying your first home.

Probably looked like this:

    Home (which equals Capital).
    Paid for by:
    Debt (borrowed from the banks),
    Plus
    Equity (contributed by you).

That’s how we do balance sheets because they make sense to the average person who has bought a home. It’s very easy for them to understand.

Think about your business for a minute:
You will have working capital (Inventory, accounts receivable, accounts payable, employee provisions etc.

You will have fixed capital (plant & equipment, motor vehicles etc).
And these will be paid for by:

    Debt (borrowed from a bank) and
    Equity (which is your wealth tied up in the business).

When you do balance sheets like this it becomes easier to understand what you’re accumulating and how you can use this to help you run your business.

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Why Some of the Rhetoric of Property Investment Gurus Doesn’t Quite Make Sense

By on December 11, 2008 in Personal Finances

Having worked around finance all my life the thing that makes me wonder is why everything seems so complicated when explained by an expert.

Below is a great comment from David Butcher who commented on my first video on George which many of you may have seen.

David’s comments raise some great points which reflect views held by quite a large portion of the community so I would like to have further discussion on his points. I will explain further our perspective on some of them in this post.

“Andee
This is quite misleading. The problem with generalisations is that everyone’s circumstances are different.

If George had a rigorous investment analysis he MAY have had a smile on his face! You have forgotten tax benefits which can be substantial. Also, the actual equity needed to purchase his investment could have been minimal compared to the purchase price. Most importantly, over time the tenant and the tax man pay for the majority of his invesment.

Cashflow is an important element when assessing an individual’s capacity to buy into an investment property, and provided his projected debt to equity ratio (based on worst case scenario assessment) is comfortable, he MAY be able to use the increase in equity for his investment property to liquidate the debt on his principal residence.

He would then have GOOD debt (tax-effective) and would liquidated his BAD debt. Of course property prices, like equities, can fall, and interest rates can rise. But his interest rate (after tax and deductions) could be around half that he is paying on his own residence and, most importantly, he takes a long-term view on property investment which historically has doubled in value every 8-10 years.

I know you are looking at the impact of cash income, but generalisations such as yours cannot be applied to everyone
Cheers”

Understand The Basics First
The reason we use a very simple example is to help people who have limited grounding in the nuances of investment understand the basic principles so they don’t get lost in the possible scenarios that experienced and professional investors might embark on.

If the simple principles are not clearly understood, then errors can be made on more complex transactions and strategies.

True wealth and real financial feedom comes from having sustainable income streams that exceed all our expenses not from having lots of accumulated value “on paper”

Tax Benefits Need Income
In order to get a tax deduction, you must first have some income to deduct against. This is why many sellers of investments look to people with high incomes who have high PAYG tax against which they can deduct LOSSES from investments in order to get a future capital gain.

The point here is that while it may be prudent to get a tax deduction, they only materialise if you have made an overall profit somewhere else that you can deduct against. Other wise you would have created net income and that would increase your tax.

Understand the True Cost of Your property Investment?
David also makes the point that with an investment property, you can get the tax man and the tenant to help you pay off the investment and therefore get a free ride into more wealth. While this is correct, it only relates to PART of the investment cost, and is often more than offset by the huge amounts of interest being paid out on the loans.

Will 400% Debt to Equity Make You Financially Free?
Another consideration is that the way most investment properties are funded means investors have to keep tipping in some of their own cash to keep the opportunity for future capital gain alive. The most common funding mechanism used is 80% LVR which means that you have $4 debt for every $1 of equity. Banks are really happy to do this because they know that the loans will be very difficult to pay off and they will have a long term interest return from the ‘buy and hold’ property investor.

To keep the maths simple let’s assume the property costs $100 and the loan is $80. The rental return before any repairs etc etc at 3% yield would be $3. The interest cost on $80 at 6% would be $4.80 which is a loss of $1.80 for which the investor can get a tax deduction. Now this is what they do for getting a capital gain in the future and long term wealth. So in these situations the bank get their return in CASH and the long term investor gets their return in NON CASH capital gain.

Understand What Returns You Are Actually Getting?
The last point is to address the notion of properties doubling in value over a ten year period. This of course sounds really good and in my view is way better than doing nothing. BUT think about it for a moment. Doubling in ten years is about 10% increase per year. That’s about 7 % compound growth and what do you get in the end. NO CASH unless you sell your precious piece of capital.

That’s why our approach is to look at ongoing cash flow throughout the term of investment. Many people are known as asset rich and cash poor which is becoming increasingly stressful as their current cash flow comes under pressure.

It’s Cash flow That Buys The Groceries
The main reason for this is that they have been focusing too much on SPECULATIVE CAPITAL GAIN and not strongly enough on the CASH RETURN. from that capital I believe strongly that people must take a business mindset to their investment which means looking to add value at every step of the way and also build sustainable cash flow throughout the life of the investment.

What Do You Think?
This whole topic is of significant importance given the recent change in economic conditions. People are reviewing their strategies and as a result I would welcome further comment from you so that we can all learn from each other.

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