Whether your business is growing or going through a rough patch, managing your business cash flow is absolutely critical, and in many cases the key to business survival.
Indeed, many businesses are profitable but ran out of cash and go under.
So how can you manage your business cash flow more effectively?
1) Understand And Accept The Amount Of Working Capital Your Business Needs
How much stock do you hold? Is your invoicing up to date? How much cash is tied up in work in progress? What is your debtors number? What is the time between when you pay your suppliers and your customers pay you? All of these issues can starve your business from cash flow.
2) Make Sure Your Business Has Enough Cash To Fund Your Working Capital Needs
You need to maintain a cash buffer, whether that be personal funds (for example in a mortgage offset account), or an overdraft or revolving credit facility. Maybe you need to consider cutting your drawings, as retained profits are a useful and cheap source of working capital.
3) Plan Ahead
Prepare your cash flow forecasts for the year ahead. If you find it difficult to establish a sales budget, start by listing your expenses, and work out what sales you need to achieve to cover your outgoings and achieve your desired profit. This will give you a sales target.
4) Plan Month By Month
Having an annual budget is one thing, but understanding your month-to-month cash flow is critical. It will show you when you may have a cash flow shortfall, which will allow you to plan for this, and build up reserves for example.
5) Review Your Systems
How efficiently do you run your invoicing? Do you have a debt collection system and process? Do you check your expenses and whether you were charged correctly? Many business owners, unfortunately, have no systems or procedures in place and it is costing them money.
6) Speed Up Your Cash Conversion Cycle
This is the time between when your business spends cash and then collects it. Can you ask your customers for a deposit, or put them on a monthly payment plan? Are you carrying too much stock? Can you negotiate longer payment term?
7) Make It As Easy For Your Customers To Pay You
It may sound simple, but do you always quote your bank account number on your invoices, or ask for direct credits or automated payments? Do you have an EFTPOS and credit card payment facility? Do you offer PayPal on your website?
8) Look Out For Ways To Cut Costs Or Improve Revenue
Can you improve productivity, automate certain processes? Can you incentivise your staff to come up with cost-saving ideas? Is there a way to increase your profit margins? You always need to be on the lookout to improve your business cash flow and bottom line.
The key to a successful business is cash flow management. You need to understand how your business works, have access to adequate working capital and adopt a planned and proactive approach.
If you need help with managing your business cash flow, contact Mitchell Walmsley via Mitchell@affluenceca.com.au.