Healthy cash flow is the lifeblood for the health and survival of small businesses. Recent surveys indicate that 60 percent of businesses have faced cash flow problems, with 14 percent enduring severe difficulties. This highlights a critical area of focus for business owners, especially since about 29%monitor their cash positions daily to avoid insolvency.
Regardless of the size of your business or the industry you work in, understanding cashflow management is essential for long-term business success.
What is cash flow management?
Cash flow management is the process of comparing the amount of cash generated through sales in your business against ongoing expenses like salaries, supplier invoices and taxes.
Why cash flow management can make or break your business
Having good cash flow management ensures businesses have the necessary funds to cover day-to-day expenses and invest in growth opportunities. By effectively managing cash flow, companies can improve their financial health, avoid unnecessary debt, and plan for future expansions with confidence.
But make no mistake: money management takes discipline, determination, and an unwavering commitment to the bigger picture and your long-term goals.
How to manage cash flow in your business
Effective cash flow management can help businesses avoid any potential liquidity issues, which can quickly escalate from crises like delayed payments or operational disruptions. These essential tips can provide answers for how to fix cash flow problems in your small business.
1. Keep your financial records up to date and accurate
Effective cash flow management in your small business depends on accurate accounting and reporting. Neglecting these areas, especially during busy times, can exacerbate challenges and disrupt cash flow management.
To avoid that happening, be sure that your financial records are routinely updated. You’ll be able to clearly see where your business stands financially at any given time. This clarity also allows you to anticipate potential cash surpluses or scarcity, which can help you avoid future financial troubles.
2. Preparing a cash flow forecast
A cash flow forecast can serve as a financial roadmap for your business. This tool allows you to predict future cash inflows and outflows, providing a clear picture of when your business might face cash shortages or surpluses.
With a forecast, you can make informed decisions about delaying expenses or securing financing in advance, ensuring you maintain a healthy liquidity position to meet both opportunities and challenges head-on. Furthermore, regularly updating your forecast will keep your financial strategy responsive to your business’s changing needs.
3. Allow your customers some breathing space – to a point
Your customers will appreciate some leniency with their payment terms, especially when business slows. Giving them extensions on their payments can help engender trust and loyalty and demonstrate that you have faith in your customers.
However, it’s important for your own business that you only be lenient to a point; don’t be pushed around, because your priority is ensuring the success of your own business. Be fair and direct, but never be a pushover. Set the terms that first and foremost work for your business.
4. Keep it as simple as possible
If you’re not confident with numbers, don’t despair as there are knowledgeable and useful resources available to help. You may hire a professional accountant to help manage your business finances. Or if you are doing it yourself, there are many accounting software products available that help simplify and speed up the process of managing cash flow for small business owners.
5. Segment your finances
Maintaining separate personal and business bank accounts is a simple, yet effective strategy for managing your cash flow. You may even have each of them with different banks just to draw a clear line between your business funds and your personal funds. This can help avoid you accidentally confusing them.
Avoid depositing business revenue into your personal account, and vice versa. This will only complicate financial tracking for small business owners
6. Create a buffer for emergencies
Creating an emergency fund is a simple method to manage unforeseen costs and financial challenges in your business. This can be invaluable for your business when the unexpected happens to your business.
Another tactic is to lower your repayments to the minimum, to stabilise your financial situation. However, this will reduce your available redraw balance over your agreed loan term, so consider that too.
7. Make your finance work for your business
If you have business finance in place, consider how it is being managed. If you are not sure, you may benefit from reviewing your current finance and discussing it with your bank.
8. Get paid faster
Your cash flow will increase if you receive payments quicker. Sending invoices immediately after delivering your service or goods is one of the best ways to do this.
Mobile EFTPOS devices allow your customers to make payments on-the-spot and receive settlements the same day, eliminating invoice delays in a terminal that is all-in-one.
9. Review your terms of trade
Consider reducing the payment terms you offer your customers, especially if it is longer than 30 calendar days. If a customer is unable to pay regularly, you may want to review your terms of supply. Think about offering a discount to customers who pay early or putting a statement in your invoices and quotes that indicates you reserve the right of charging interest on late accounts.
10. Review your inventory
Conduct frequent counts of your stock to ensure you are only holding as much as required to run your business efficiently. If your inventory is overflowing, this excess stock can tie up money and increase storage and insurance costs.
11. Budget your spending
If you’re a start-up, it can be easy to overspend as you try to make an impact. Keeping key jobs at the top of your list of things to do can help you to prioritise things such as launching or promoting your business. Thinking about the cost and the relative benefit it might bring can help you assess what you need to do and what might be an ‘impulse spend’.
12. Avoid paying early
It’s also worth checking your suppliers’ payment terms and making sure you don’t pay early if you don’t have to. For example, if a payment is due in 30 days, don’t pay it in seven days unless there is a discount for early payment. This will help you keep money in your account for longer.
Using a business credit card to pay suppliers can be a way to manage money, so long as you can pay your closing balance in full at the end of each month to avoid having to pay interest.
Cash flow is as critical to the long-term success of your business as small business insurance (such as Public Liability insurance and Professional Indemnity is. Get your small business insurance quotes sorted quickly and easily online with BizCover by calling us on us on 1300 920 864.
