Positive Results when you manage your Cashflow
Cash flow = Money Coming into your business – Money Going Out of your business
Cash flow is the life blood of any small businesses, so make sure you closely manage it. Ideally, you will always have more money coming in than going out, but the reality for most small businesses is that this is not the case. Most have to pay staff and suppliers before they get paid themselves. This lag in payments is a major challenge for small businesses, and how well you manage it will have a major impact on the health and sustainability of your business.
Small businesses focus on managing expenses and generating sales, but can forget to manage cash flow. A lack of cash, even temporarily, has the potential to adversely disrupt your business and your ability to generate revenue. It can limit access supplies and staff, can result in late fees and interest charges and create stress for yourself which impacts your decision making.
Any problems with cash flow need to be dealt with immediately, rather than hoping that they will resolve themselves.
The following guide outlines five ways to improve the cash flow for your business.
1. Is your business profitable?
Your cash flow problem might be because you haven’t got the basics right. While it seems like an obvious thing, a quick check to make sure your total revenue (sales) is greater than your total expenses should be the first place you start. Not making an allowance for all your expenses in your pricing is a common mistake made by small businesses. Remember you still have to pay for fixed costs so your margin needs to cover these.
2. Understand the cash flow of your business
Businesses go through cycles (highs and lows) and while they can even out over time, they can put pressure on the business. Have you got enough to cover the ups and downs of your business? If you have a busy December and a quiet January do you have enough in reserve to get the supplies and staff you need to get through the busy period? Do you have enough to get the bills paid when it goes quiet? By analysing your historic cash flow you will understand where the peaks and troughs are for your business and be able to manage your cash to cover these periods.
Understanding these patterns will help you with more than just cash flow. It will assist you in managing related areas such as staffing and marketing. Knowing that you historically have a slow month in June can help you decide to run a marketing campaign in April to generate new sales for this period, rather than run one in October for an already busy December.
A budget can help level out the highs and lows.
3. Manage the outgoings for your business
Managing your expenses is the most immediate way to improve cash flow as you have direct control over what is spent and when it goes out of your business.
1. Improve your outgoings by reviewing your list of expenses, item by item. For each item, ask does it generate sales?
- No, then ask yourself is it essential and what the impact will be if you cancel it. Remove the expenses that are not essential. Work to reduce fixed costs.
- Yes, is the ROI positive? And what can be done to improve it? Look at ways of making each dollar you spend return more for your business.
2. Create a budget (and stick to it)
- Understand the cost of running your business for 12 months and then allocate your budget accordingly.
- A budget can help you even out the peaks and troughs and therefore help manage cash flow.
- Review your performance against budget monthly.
3. Review stock
- Don’t hold stock or buy more stock than you need. This can free up cash (especially if you don’t use this stock regularly)
- Check stock levels before reordering.
- If stock is unorganised and hard to find, then sort it out.
- Sell old stock that is not going to be used in the near future, even at cost.
4. Consolidate
- Consolidate suppliers and negotiate better rates and payment terms.
5. Controls
- Put controls in place to manage expenses.
- Beware of waste. It creeps into your business easily. Controls help you stay vigilant.
4. Than hang onto the cash for as long as possible (putting it to work while it waits)
- Purchase on account with the longest payment term possible.
- Pay on the due date, not early and not late.
- Pay by credit card (negotiate no credit card processing fee)
- Pay the credit card BY THE DUE DATE
5. Get cash back into your business faster
- Invoice regularly
- Make it easy for people to pay you, include various payment options like EFT, Credit Card, PayPal
- Have a clear due date on the invoice
- Keep your payment terms tight
- Manage and improve accounts receivable
- Have a debtors management process
- Review receivables regularly
- Know your late payers and have a plan to manage them
- Use SMS reminders
- Prompt for payment (make a phone call and then send a letter/email)
- Credit checks for non-cash customers
- Use a collection agency if necessary.
- Reward quick payment
- Implement a late payment fee
- Ask for upfront payment or a deposit to proceed with work
- Get progress payments in place at the beginning of the project, especially if it is large or over an extended period of time.
- Ask to get paid.
Ongoing
- Cash flow is an organic thing. Review your cash flow regularly to see that the improvements you have made are working and that there hasn’t been a change in patterns. Make this easy for yourself by putting in place processes and systems.
- Put in place controls, processes and systems to support you to manage your business.
- Across the board, negotiate better rates and this will improve cash flow, margins and profit for your business, but be conscious of not compromising service to your business as a result.
- It is always recommended that you engage with your accountant to understand the industry averages for your business.
- Review regularly, at least quarterly.
Improving cash flow for your business will reduce your stress and free up cash to grow your business. If you would like more information on improving your cash flow then call Clever Cow on 9981 3137 or email info@clevercow.com.au
