How healthy is your cash flow?

February 2015

Cash flow issues are common at the start of a New Year for many SMEs, who often find it difficult to make ends meet in January and February after slower than expected sales or invoicing over the Christmas and New year break.

Cash is the lifeblood of any business, and while income may slowdown, costs generally remain the same. Failing to plan for the slower months can make for a bumpy ride until business returns to normal.

So what are the key things that you can do to improve your business's cash position?

1) Create a cash flow budget - and use it

A cash flow budget is an essential planning tool for small business owners to know whether they will have enough cash in the business for ordinary operations.

"Not having that visibility of cash flow can make it impossible to anticipate much less plan for difficulties that arise when the cash coming in isn't quite enough," says Bates Cosgrave Director, Glenn Cosgrave.

"Unexpected expenses can really hurt a small business when cash is tight. Knowing your position can help the business owner make much better decisions, because they have awareness of what is coming in terms of revenue and expenses."

If you don't already have a cash flow budget, speak to your accountant or bookkeeper, who can help you get started in mapping your cash flow. Many accountants are moving their clients onto cloud-based tools such as Xero or Saasu, because they provide real-time visibility of the performance of the business. 

Your accountant can also be given access to your online accounts to help identify and plan for potential cash flow issues and methods of mitigating them.

2) Rethink your stock levels

Holding unnecessary inventory will lock up your cash, as many businesses buy larger quantities of stock to gain a price advantage or better delivery terms.

The problem is that if your cash is tied up in inventory, you're not able to access it immediately. 

The first step to releasing some cash is to look at your stock levels and review how you order and what you hold. Understand which items have a higher margin and turnover as well the products that are slow movers, damaged or obsolete. This will help you to put in place a more efficient, cash flow friendly stock management and ordering process.

But what to do with the excess stock? It's important to devise a strategy to bring cash back into the business. Work with your sales and marketing team to develop offers, discounts or product package deals that can be implemented quickly and repeated throughout the year when cash flow is likely to be slow.

Bulk ordering at a discount - and early payment - can reduce the overall cost of stock but must be planned carefully to fit into the cycle of your business. 

3) Be firm on your payment terms

One of the problems many small business owners face is longer payment cycles, in some cases up to 90 days. This creates a nightmare scenario for SMEs who often can't afford such long credit terms.

"Make sure you are very clear about payment terms for customers doing business with you," says Glenn. "Invoice on time and follow up promptly when payment falls due. That follow up is important to make sure your invoices are paid on time."

Another tip: pay your expenses when they are due. This is a courtesy to the people who supply your business and is good for your client-supplier relationship.

4) Talk to your bank

If you can see a short-term bumpy road for your business cash flow, talk with your bank or finance broker about options to help you manage cash flow until business returns to normal.

"It's far better to be proactive and work with the bank to show them what you're doing to return business cash flow back to normal than to wait until you're in the middle of a cash crisis, " says Glenn. "If you can demonstrate what you're doing to manage the short-term issues, you're more likely to keep the bank onside."

5) Play the long game

The key to successfully managing cash flow is having buffers in place and the discipline to maintain them over the long term. 

Set, check and keep buffers in place to cover and maintain the business's outgoings and then make sure you're meeting – or preferably, exceeding - your performance benchmarks. Don't be tempted to take money out of the business unless you're achieving those targets. 

Staying on top of your cash flow is essential for your business's health.  Your advisors are well placed to help develop effective strategies that will help your business both in lean and abundant times by evening out cash flow, planning the timing of your expenses and supporting you to obtain finance where it's needed. 

Contact us on 02 9957 4033 to speak to one of our team.


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This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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