We’ve all come across the adage that ‘cash is king,’ yet despite its widespread use, cash flow management is an aspect of business that often goes overlooked.
Effectively managing your cash flow is crucial for the sustained survival of your business. It ensures you maintain sufficient working capital to navigate through slower periods effectively.
Your cash flow influences your future spending choices and the trajectory your business is likely to follow. Thus, staying vigilant about it constantly can aid in making informed decisions.
As we approach the financial new year, set a goal to enter it with a well-defined cash flow plan that aligns with your business objectives. Here are some practical tips to kick-start your planning process.
Plan and monitor your cash flow
A reliable cash flow forecast enables you to track the inflow and outflow of funds in your business. It aids in pinpointing periods of surplus or potential shortages, serving as an early warning system to steer clear of future financial pitfalls.
A robust understanding of your business’s financial forecast empowers you to make informed decisions year-round.
Identify strategies to increase cash inflow or decrease cash outflow effectively.
For increased cash, assess pricing adjustments, boost sales volume, and optimize debtor management. Conversely, reduce cash outflow by scrutinizing expenses, inventory, and staffing to identify potential savings. Consider refinancing loans or selling underutilized assets for additional liquidity.
Increase your sales
Boost sales by launching an advertising campaign aimed at expanding your customer base. Marketing efforts need not be expensive; utilizing digital channels such as social media can offer a cost-effective means to advertise and showcase your products or services.
Tighten terms of credit
Mitigating late payments is crucial for small businesses. Implementing measures like minimizing debtor exposure and establishing documented systems can help manage cash flow effectively.
Perform due diligence on debtors before engaging with them to reduce potential risks to your cash flow. Requesting short payment terms and issuing invoices promptly with clear payment conditions are prudent strategies. In Australia, payment terms are legally binding under contract law.
For projects requiring substantial upfront costs, consider requesting deposits or milestone payments. Offer multiple payment options to customers, such as bank transfers, credit cards, EFTPOS, and PayPal, to simplify the payment process.
To expedite payments, incentivize early payment with discounts. If late payments persist, explore options to recover funds and assess the viability of continued business relationships with delinquent debtors.
Monitor stock levels
Optimize stock management by adjusting purchase quantities and timing to align with periods of stronger cash flow. Conduct regular inventory assessments and maintain stock levels necessary for efficient business operations, as excess stock can tie up capital, increase storage costs, and impact insurance expenses.
Reduce your outgoings
Effectively managing cash flow involves minimizing outgoing payments. Explore ways to save money through streamlined practices and reduced operational expenses:
- Reduce energy costs by using energy-efficient products or scheduling activities outside peak electricity usage times.
- Identify and address areas of wastage or inefficiency in production processes.
- Review contracts for insurances, phone, and internet services to secure better deals upon renewal.
- Negotiate lease terms with your landlord to potentially lower rental costs.
- Negotiate with suppliers for favorable pricing or bulk discounts.
- Target advertising efforts to your local area to reduce travel time and fuel expenses associated with servicing customers outside your immediate vicinity.
Build a cash reserve
Building a cash reserve provides the financial security and confidence necessary to expand your business and handle unforeseen expenses. It enables you to capitalize on strategic investments or cost-saving opportunities, such as bulk purchases.
Improve your financial skills and get expert advice
Enhancing your understanding of business financials is crucial, especially in the early stages. Investing in your financial knowledge and skills can greatly improve cash flow management and overall financial management. You might consider attending workshops or seeking advice from experienced accountants or Small Business Development Center (SBDC) advisers to gain valuable insights and guidance.
Use technology to help you
If numbers aren’t your strong suit, consider hiring a professional accountant and utilizing reliable accounting software. This combination ensures you have a clear understanding of your cash position and facilitates accurate cash flow forecasting for planning purposes.
An increasing number of business owners are adopting cloud-based accounting solutions to enhance productivity and efficiency. These systems offer real-time visibility into cash flow, simplifying proactive management and forecasting processes while reducing time commitments.
