Cash flow in business is imperative if the business is to survive and building and keeping an adequate stockpile of cash provides maximum opportunity and flexibility to any business while enabling its owners to sleep soundly at night. Even so, many small business owners will admit they have or have had a cash flow problem.
So how do you know if you have a cash flow problem? It’s really quite simple – if the business is spending more than it’s earning then it has a negative cash flow. The same rule applies for projected cash flow which is an estimate or projection of what the business income and expenses are likely to be.
What causes cash flow problems and how do I avoid them? A negative cash flow may well be expected in a start up business where it’s yet to start earning an income and build up cash reserves. In these cases the owner may make a capital injection into the business or consider taking up a loan again the business assets. Cash flow issues in a more established business may be attributed to the business owners’ failure to accurately estimate their income versus expenses and/or the failure to analyse their financial reports until it’s too late. Keeping a good eye on three simple financial reports could assist in avoiding cash flow issues.
- Profit and Loss Statement – will show your business income and expenses over a period of time and will let you know if your income is no longer meeting your expenses.
- Balance Sheet – will show your assets and liabilities on any given day and will tell you what your business is worth. Your assets less liabilities = your business worth.
- Cashflow statement – shows money coming in and going out of the business for a set time period and will give you warning signs to help avoid future financial trouble.
Tips to Improve Cashflow
- convert sales into cash as quickly as possible by getting your products to your customer faster.
- for those whom still receive cheques as customer payment ensure to deposit to the bank as soon as received.
- ideally you would like to receive COD on the delivery of your product to your customer however this may not always be possible therefore ensure you have trained your customers and made your payment terms very clear.
- consider taking up front deposits for your services where the outlay for the contract is large and set up payment schedules that parallel or exceed your ongoing costs.
- if your customer demands modification of standard products or services that have not been identified in your contract, seek additional payment through fees or change orders.
- small businesses providing a regular service or product could consider subscription sales whereby customers prepay. In addition to receiving upfront cash to cover future costs, the business has the advantages of securing future sales and scheduling time well in advance.
- consider charging interest on overdue invoices and ensure these terms are included on your invoice.
- send monthly statements to customers with an overdue balance.
- ensure you have a variety of options for customers to pay. These may include cash, cheque, credit card or payment plan. If you plan to accept credit cards ensure you the charges you will incur are incorporated into the fee.
- determine how your business will deal with late paying customers, document that decision into policy and stick to it.
- keep good relationships with your suppliers in case you ever need to extend a payment deadline and where you make payment arrangements ensure you stick to them so that your credibility remains intact.
- keep your financial records up to date so that you have accurate real time data to evaluate.
- keep your cash working for you by placing it into interest-earning accounts whilst it’s not being utilised.
- ensure you keep aside your GST, withholding taxes and superannuation liabilities so that you are prepared and able to make payment at the end of your reporting period.
- try to cut or avoid unnecessary expenses and delay payment as long as possible (whilst complying with supplier terms) to reduce demands on cash.
- set regular maintenance programs for equipment and look at repairing rather than replacing.
- check out used equipment before investing in brand new as it’s possible to sometimes buy quality used equipment.
- if you have concerns about cash flow – speak to a professional to gain advice before problems arise.
