9 tips for making cash flow work for you
It’s vital for small businesses to effectively manage their cash flow. It can mean the difference between your business surviving or not. Here are our tips for managing cash flow like a pro.
- Understand your working capital needs
Are you completely aware of exactly how much working capital your business needs to operate? The cash your business needs to operate depends on a number of factors, including the amount of inventory you hold, how long it takes between you paying your suppliers and receiving payment from your customers, whether your invoicing is up to date, how much your business is owed, and so on. It is necessary for you to have a realistic understanding of what you need to keep your business running.
- Build a buffer to fund working capital
Once you have a picture of your actual working capital requirements, you’ll need to ensure you have enough cash to fund it. This means creating a buffer or cash reserve to cushion your business from unexpected circumstances and costs. Experts often advise small businesses to have a buffer of at least three months’ worth of outgoings in their business bank account, whether cash that is easily available or a revolving credit or overdraft facility. Note that retained profits are considered the most cost-efficient source of working capital, so you may need to consider cutting your expenses.
Building a cash reserve can be difficult for a small business, but it’s imperative to help insulate you from the volatility of economic cycles and make you less dependent on the sometimes capricious decisions of banks and lenders. Not only that, but you will have the ability to take advantage of opportunities that arise, such as discounts on stock, or being able to fulfil an unusually large order.
- Plan for the future
Make sure you prepare cash flow forecasts for the upcoming financial year. Predicting sales can be tricky, but if you determine what all your outgoings are first, you can usually then work out what the level of sales will be required to cover the outgoings, providing you with a target and making it easier to work out what your borrowing facilities with lenders should be.
As well as preparing annual forecasts, it’s smart to plan month by month. A monthly spreadsheet template can help. This can allow you to discover potential issues well in advance of them becoming major headaches.
- Review your systems
Small businesses sometimes neglect this step, but it’s important to get an overview of all your business systems, including invoicing. Have a really good look at how you are set up: do you invoice at the end of the month or as you go? How quickly are receivables collected? Are you fully aware of what is owed to you or what your business owes its creditors? Don’t forget to evaluate supplier costs and how you are being charged by them.
- Focus on your cash conversion cycle
Your cash conversion cycle measures the time between a business disbursing cash and collecting it. Ideally, you want to speed this up, particularly if you run a business with inventory. It may be that you need to cut stock levels or set up longer payment terms with suppliers to ensure you have a shorter cash conversion cycle. It will also help to speed up the way you are paid by clients.
- Cut costs to improve revenue
Anything you can do to improve your revenue by cutting costs will help you improve your cash flow. Take a proactive approach to increasing income by evaluating supplier costs, eliminating unproductive services or product lines, removing difficult or very slow-paying customers or non-contributing staff members.
- Stay on top of your accounting
Keep a close eye on your accounting and reporting systems so you maintain a comprehensive overview of your business’s financial situation. Make sure your books are up to date. Be aware of your accounts receivable turnover and watch how it trends. Watch you’re ageing invoices and act fast to chase overdue accounts before your cash flow situation becomes a problem. Don’t be afraid to call in help from a debt collection agency early to avoid problems snowballing.
- Simplify and streamline your accounting and invoicing system
The more efficient your invoicing system, the better for your business. Take advantage of the benefits of online invoicing software which greatly simplifies the process and can dramatically speed up debtor payments. Good accounting software also makes forecasting cash flow and budgeting easy, so that you can keep an eye on your working capital needs. Tracking and reporting key business metrics is made easy with many good quality accounting software systems, giving you a better grip on managing your cash and avoiding running out of working capital.
- Make payment easy for clients
Being owed money by clients is the quickest way to ruin your cash flow. It’s absolutely necessary to ensure you are paid as quickly as possible. Collecting from customers should be as efficient as possible, ideally using online invoicing systems which speed up the process and make it very easy for customers to pay, giving them options for instant credit card, EFTPOS and PayPal payment. And avoid being too lenient—if it is necessary, bring in your debt collection agency early, and ensure your client pays for debt collection activity by outlining this in your terms of trade.
Effectively managing cash flow is fundamental to small business success. By implementing these tips, you’ll not only protect your revenue, but you’ll also set yourself up for long term success.