Smart cash flow strategies for your small business

In business, cash flow really is king, and it’s the fuel by which businesses run smoothly. Without adequate supplies of cash, your business can end up on the rocks. No matter how profitable you are, you’ll be flooded if you can’t afford to buy stock, pay your suppliers, or manage operating costs.

Many talented and capable entrepreneurs with great ideas have seen their businesses collapse because at one point the amount of cash going out of the business was so much greater than the amount of cash coming in. Unfortunately, many business owners don’t understand the vital importance of cash flow and would enjoy success if it weren’t for their inability to understand some fundamentals. According to research by business information company Dun and Bradstreet, more than 80 per cent of business bankruptcies in Australia are related to cash flow rather than sales pressures.

A good business is one with a positive cash flow where the amount coming in each month is at least equal to the amount going out. Here are some strategies to help you stay in control of your cash:

Create a Cash Flow Forecast – The first step is to get an idea of ​​what your cash flow is doing today and what it is likely to be doing tomorrow. You need to be able to keep track of what goes in and out, and when. This prevents unpleasant surprises and will greatly reduce stress and worry about upcoming imagined problems, which may not be as bad as you think. With a proper forecast, you can see weeks in advance when cash flow problems are likely to arise, giving you plenty of time to devise a strategy to deal with them.

As you grow, your infrastructure must support that growth. If sales skyrocket, more inventory and staff may be needed, and this means spending money upfront. But do you know exactly when you will get it back? Many companies are focused on increasing turnover, but they don’t take into account the increased costs associated with that, and before they know it, they can’t afford the operational costs involved to keep up with sales.

A cash flow forecast will identify potential cash shortfalls so you can take action to ensure you have enough money before making large financial commitments. It also allows you to detect problems when they are likely to occur. If you are in a position where you need to obtain external financing, a cash flow forecast is an essential part of the tools you will need to use to obtain financing. A forecast is usually created for a fixed period of six or twelve months and is divided into weeks or months. Includes:

• Payments – any money owed in that period (places, salaries, telephone bills, etc.).
• Receipts – Any money that comes in during that period. This will be actual and forecast (estimating revenue is tricky, but be honest).
• Bank balance at the beginning of the period.
• Bank balance at the end of the period.

Stay on top of accounts receivable: In an ideal world, your customers pay you the instant sales are made and before you start making payments. Then there would be no cash flow problems. Unfortunately, we operate in the real world, but you can improve your cash flow by better managing your accounts receivable. These include:

• Credit checks on all new customers.

• Offering incentives such as discounts for customers who pay early.

• Increase the payment methods you will accept, including accepting credit cards.

• Issuance of invoices promptly.

• Ask customers for a deposit each time they place an order.

• Propose stricter payment terms.

• Invest more time and effort to chase down late payments. If a client cannot pay the full amount, be flexible and arrange a payment plan.

• Don’t be afraid to say ‘no’ to persistent defaulters. No one likes to turn down business, but you could fail if you accept an order from a customer who hasn’t paid yet.

• Regularly review your accounts receivable report and follow a consistent plan to deal with past due accounts. Have a fixed day every week or fortnight to persecute debtors and follow religiously. A consistent approach with clear and friendly communication is the key to building a relationship.

• Track Your Days Due – With customers currently averaging more than 50 days to pay off their invoices, it’s more important than ever to a business’ cash flow to start implementing some of these tips to generate $ faster. To calculate how quickly your customers pay you, multiply your outstanding debtors at the end of the month by 365 days and divide by your annual sales. As an example, a business with a turnover of $400,000 with debtors of $50,000 will have debtor days of 45. If they were to reduce this to 30 days, think about what this would mean for your cash flow. And then consider the fact that up to 20% of the value of an overdue invoice can be lost due to recovery costs.

• Make it easy to get paid. Account statements should be clear with expiration dates and payment options visible. Send account statements periodically.

• Do not continue with additional work or shipment of goods until previous debts are paid.

• Reduce errors – Make sure you have the correct price and quantities on your invoices.

• Customer Dashboards and Management Reports – Make sure your staff or bookkeeper provide you with old debtor reports and/or real-time dashboards in your accounting software that show days owed, outstanding invoices, etc. at a glance.

Have firm control over payment

Don’t get complacent about fabulous sales figures; you have to watch your spending like a hawk:

• Establish good communication with your suppliers. If you ever need to delay a payment, you’ll want your understanding. Don’t let problems accumulate; deal with them as they occur.

• Perform regular annual vendor price checks and requests.

• Consider buying in bulk for better prices.

• See if you can make advance payments at a small discount, when you have the cash, or pay annual expenses like insurance on a monthly payment plan.

• Consider opting for providers that offer more flexible payment terms. Don’t always look for the lowest prices.

• Have a budget and compare the actual expenses each month with the figures in your budget.

• Compare expenses with the previous year.

• Compare expenses as a percentage of sales: Set KPIs (Key Performance Indicators) so you can track whether, for example, your salaries this year represent a higher percentage of your turnover than last year.

• Manage stock regularly and eliminate old and obsolete items by packing them together or discounting them.

• Train your staff to cut costs and offer creative rewards for doing so.

• Prepare and analyze periodic financial reports.

sales increase

This, of course, is the main concern of all companies. How you increase your sales comes down to how good your product is, what your competitors are doing, and their marketing strategies. Now you don’t want these sales to be on credit, as that will only increase your accounts receivable. You need the cash.

Also be sure to regularly review your pricing, as getting your pricing strategy right is critical to your business success. It will impact the type of customers you attract, what they buy, and how they perceive your product.

Put these strategies into action

You can have fantastic products and services and stellar customer service, and still fail. Every hour spent dealing with cash flow crises is one hour less than could be spent dealing with customers, selling products, or planning for growth. Maximizing your cash so you don’t go short can get you on the fast track to bigger profits.

If the thought of delving into the financial side of your business gives you the creeps, find a great bookkeeper who can do all the hard work for you and present you with clear visual reports and advice on how to maximize your profits.

Business Jargon Buster

There’s an old business saying that “turnover is vanity, profit is sanity, cash flow is reality.” He tells you everything you need to know about financial control. Understanding the difference between them is imperative:

Turnover: The volume of sales in a specific period of time.
Profit – the net income; what remains after expenses are subtracted from the sales turnover.
Cash Flow: The money going in and out of a business.