It’s important to understand that cash isn’t a representation of a business’ value, nor a measure of success; but it is the life blood of any business. For small to medium sized businesses, not maintaining control of cash flow can be one of, if not the most critical component as to whether a business fails or thrives. Poor cash flow management can rapidly impact the operation of a business, creating severe issues like not having the ability to purchase new inventory, paying back loans, or even worse, not being able to pay employee wages – even if you are making a profit.
The reality is that smaller businesses often need to adapt to the strict terms enforced by the larger organisations in order to maintain business, which means a greater visibility and control over cash flow is required.
Our top 5 cash flow management tips to help small business manage their cash flow and improve their current financial position.
1. Budgeting vs Cash Flow Forecast
Don’t just budget your P&L. The way money flows through a business does not necessarily reflect operations. For example, your expenditure happens in month one, you make the sales and must pay your creditors in month two, but your debtors do not pay you until month three. Producing a cash flow forecast enables you to anticipate peaks and troughs, enabling you to plan purchases and production.
2. Know your customer
Always check the credit worthiness of your customers. Obviously, this is limited, but can help you tailor payment terms and expectation. There is no requirement that each customer to have the same credit terms. Establishing clear payment terms is a cornerstone of good cash flow management.
3. Have a clear credit control process
Squeaky Wheel! Chances are you don’t have a large credit control department, but you should still act like you do with a formalised credit control process. A clear process to manage bad debt at different steps…and a will to stick to them. At the very minimum, document your interactions so you can see which stage the debt process has reached and ideally assign actions for each stage.
4. Incentivise payments
If a consistent inflow of operating cash is vital to the business’s growth and survival, you may want to incentivise your debtors with early settlement discounts. This is where the customer receives their goods at a reduced price for early payments, minimising the chances of slow payers or bad debt, whilst maintaining a steady level of cash flow to support day to day business operations.
5. Outsource to Professionals
Whilst it is fairly easy in 2019 to automate a large part of your collections process, good cash flow management requires regularly update of your cash flow forecast and a solid understanding of your cash conversion rate. Like every commercial business decision, the return on investment needs to be examined, and the main question you need to ask is do you have the skills and time or are those more suited to tasks other than collections and cash flow management.
If you do not have a clear picture of your cash position, both now and into the future, contact us to discuss how we may be able to help enquiries@yourfinancedept.com.au or call 07 3123 6176 to speak with one of our accounting specialists.
