You will have probably heard the expression ‘cash flow is king’ and there is no better time than the start of a new financial year to commit to smarter cash flow management in your business.
There’s a reason many business owners stress a lot more about cash flow than they do about profits or building equity. A steady flow of income, is essential to business success, for start-ups and multinational corporations alike. It has an impact on everything from simple solvency to projections and planning for the future. So when the cash is more trickle or flood than flow, it’s easy to lose sight of the basics. Here’s what you need to remember to take control of your cash flow.
Look for patterns
Looking for patterns is one of the first steps to identifying the real cause of your cash flow issues. For example, your business revenue might be seasonal to some extent. Your clients and customers’ purchasing decisions (and ability to pay) could be affected by factors like the end or start of financial year, Christmas and public holidays – even the extreme weather that comes with the seasons. It shouldn’t take years to identify patterns, either; with our help and external data, you can spot statistically significant lulls in cash flow within months. Make sure you also note when tax payments are due.
Don’t wait for monthly or quarterly reporting to find out that your cash flow is less than ideal. Monitor your situation in real time (or as close as possible) with the right software or digital tools. Many accounting software packages have built-in alerts that help you manage your cash flow a bit more proactively. Some business admin tools also help automate accounts receivable tasks. If you’re not already using software you love, take your time to do some research and find an option that’s scalable for your operations.
Review your credit policy
Just because you started your business or outlined your business plan with a particular credit policy, doesn’t mean you have to keep it. Just as your client or customer base grows and diversifies, so to can your credit policy. You might have a few different sets of terms for different types of customers – perhaps more generous for your most trusted long-term customers. The most important thing here is that you stick to your policy. If that means taking a bit of extra time to do your due diligence on potential new debtors, so be it. Then prioritise your collections, to ensure you are getting paid for all the work you’ve completed.
Prepare for all scenarios
Do you have cash flow contingencies built in to your business plan? If not, set them up now. Look at best case scenarios and worst case scenarios. Get together with your business partner/s or a trusted advisor to brainstorm what could happen, and what you’d do in each situation. By having some solutions ready to go and approved by relevant stakeholders, you’ll feel less panicked if you have a temporary lean phase.
One potential option is building up some capital reserves. Just like you might have an emergency fund for your personal or household finances, you can save extra money in good times, instead of distributing it as profits or re-investing it straight back in to operations. There are tons of different business savings account products in Australia. But the fact that 46% of small to medium business failures are linked to inadequate cash flow indicates that some operators aren’t as good as others at building up their reserves strategically.i
Broader business planning
Your plans to combat slow cash flow don’t just have to be reactive. They don’t have to begin and end with the accounts receivable process. Depending on the nature of your operations, you may look at creative ways of getting your business through those slow cash flow times. Could you change your approach to marketing and promotional activities? Is there a new higher-volume product/service you could introduce, so you’ve got money coming in while you wait for payment on big items/jobs?
If you’ve got concerns about how your cash flow is impacting your business, please get in touch. We’re here to help you strategise and put measures in place to feel on top of this important aspect of your business.