According to the Australian Bureau of Statistics 42% of small businesses fail in the first four years. So, for a small business to keep afloat, one of the things you need to keep a close eye on is your cash flow. Here are a few tips on doing just that.
Set up a cash flow budget. Your cash flow projection represents likely income and outgoings over the period of time you have selected. There are some budgeting and cash flow software around, like MYOB, but you can also set up your own program in Excel. If you’re not familiar with Excel, ask your accountant or bookkeeper for help to set it up properly initially. They can also help you select suitable cash flow software.
Cash flow budgets are the best way of preparing for cash shortages that may arise. A sudden growth in sales often leads to low stock on hand and/or debtors not being tracked or followed up when they go overdue. Strong sales one month may also often lead to a cash shortage the next month due to replenishment of inventory levels while sales are down to normal. By monitoring your business’ cash status you may want to arrange credit from banks and suppliers to cover the temporary shortfalls. As you would know, these arrangements take time to set up so it is best to be prepared in advance.
Don't ignore your balance sheet. This may sound obvious, but many owners don't know how cash flow works and focus on the profit and loss statement alone. Healthy profits doesn't necessarily mean a healthy cash flow. Some cash flow information is also contained in the balance sheet, for example loan repayments, debtors and creditors payments, inventory, etc.
Review & update cash flow budgets regularly. You may choose to review your cash flow budget weekly, monthly, or even quarterly. This depends on the predictability of your business' cash flow. Generally the the greater the cash flow uncertainty, the more often a new cash flow budget should be prepared.
If cash is really tight, you may want to move to weekly projections to best manage your cash flow. Watch your bank balance, follow up on accounts receivable as soon as possible, decide which invoices to pay now and which one's to delay, and make sure all cash and cheques are deposited as quickly as possible. This is time consuming, but you won’t be the first business that has had to do that from time to time.
Credit Terms & Timely Payments.
Master the art of debtor management. Set clear limits to your terms of credit and follow up on overdue accounts as soon as possible. Offer small discounts for early payment as an incentive.
Pay creditors strategically.
Wages, taxes and direct debits are at the top of the list for on-time payment.
Take advantage of credit terms and prioritise payments according to the consequences involved in going overdue. Key suppliers may be prepared to wait a while to keep your business. Don’t be afraid to negotiate discounts on timely or early payments to creditors.
Plan for low cash flow periods. Be aware of when low cash flow patches are coming up and plan accordingly. Avoid funding major purchases from your business’ working capital unless you are sure you have the cash to cover it.
Arrange finance products to use to your advantage. Overdrafts, lease facilities and cash flow funding products can all be excellent tools to help with cash supply for planned outlays. Even the business credit card can be a good way to ease the squeeze as long as you are sure the debt can be paid before interest kicks in.
Avoid incurring tax and other statutory penalties. You may want to set up a savings account with a high interest rate and put away some extra money for GST/BAS payments and any other taxes.
Cash Drawings. Make sure to keep personal cash drawings to a minimum and according to the cash flow forecast.
Set up a cash flow budget. Your cash flow projection represents likely income and outgoings over the period of time you have selected. There are some budgeting and cash flow software around, like MYOB, but you can also set up your own program in Excel. If you’re not familiar with Excel, ask your accountant or bookkeeper for help to set it up properly initially. They can also help you select suitable cash flow software.
Cash flow budgets are the best way of preparing for cash shortages that may arise. A sudden growth in sales often leads to low stock on hand and/or debtors not being tracked or followed up when they go overdue. Strong sales one month may also often lead to a cash shortage the next month due to replenishment of inventory levels while sales are down to normal. By monitoring your business’ cash status you may want to arrange credit from banks and suppliers to cover the temporary shortfalls. As you would know, these arrangements take time to set up so it is best to be prepared in advance.
Don't ignore your balance sheet. This may sound obvious, but many owners don't know how cash flow works and focus on the profit and loss statement alone. Healthy profits doesn't necessarily mean a healthy cash flow. Some cash flow information is also contained in the balance sheet, for example loan repayments, debtors and creditors payments, inventory, etc.
Review & update cash flow budgets regularly. You may choose to review your cash flow budget weekly, monthly, or even quarterly. This depends on the predictability of your business' cash flow. Generally the the greater the cash flow uncertainty, the more often a new cash flow budget should be prepared.
If cash is really tight, you may want to move to weekly projections to best manage your cash flow. Watch your bank balance, follow up on accounts receivable as soon as possible, decide which invoices to pay now and which one's to delay, and make sure all cash and cheques are deposited as quickly as possible. This is time consuming, but you won’t be the first business that has had to do that from time to time.
Credit Terms & Timely Payments.
Master the art of debtor management. Set clear limits to your terms of credit and follow up on overdue accounts as soon as possible. Offer small discounts for early payment as an incentive.
Pay creditors strategically.
Wages, taxes and direct debits are at the top of the list for on-time payment.
Take advantage of credit terms and prioritise payments according to the consequences involved in going overdue. Key suppliers may be prepared to wait a while to keep your business. Don’t be afraid to negotiate discounts on timely or early payments to creditors.
Plan for low cash flow periods. Be aware of when low cash flow patches are coming up and plan accordingly. Avoid funding major purchases from your business’ working capital unless you are sure you have the cash to cover it.
Arrange finance products to use to your advantage. Overdrafts, lease facilities and cash flow funding products can all be excellent tools to help with cash supply for planned outlays. Even the business credit card can be a good way to ease the squeeze as long as you are sure the debt can be paid before interest kicks in.
Avoid incurring tax and other statutory penalties. You may want to set up a savings account with a high interest rate and put away some extra money for GST/BAS payments and any other taxes.
Cash Drawings. Make sure to keep personal cash drawings to a minimum and according to the cash flow forecast.
