We all know that cash is King. No matter how great your business model is, or how profitable your business is, it won’t survive if you can’t manage your company’s cash flow. Simply put, poor cash flow equates to not enough cash coming in the door and too much cash going out the door. Businesses need to get paid on time and manage their outgoings in order to maintain a successful upward business trend.
According to the ABS, half of all businesses go out of business in the first three years of operation. And, according to the Australian Securities and Investment Commission, poor cash flow is cited as a factor in more than 40% of business failures.
A strong cash flow is essential for small businesses to stay ahead. At this time of year in particular, as business slows down for many industries, it can be very challenging for businesses to manage the money flowing in and out.
Here are five ways to help manage and improve your business’s cash flow.
1. Create a Cash Flow Forecast
A cash flow forecast is an estimate of the amount of money you expect to flow in and out of your business and includes all your projected income and expenses. Forecasting your business cash flow helps offset uncertainty by predicting peaks and troughs in your cash balance. A forecast highlights the cycles in your business and predicts your cash flow on a monthly and yearly basis.
First, draw up a list of the payments you need to make over the next year – this may include stock and equipment, wages, rent, loan repayments and taxes. Next, list what money will be coming into the business – this can be anything from customer payments, interest on savings and investments to tax returns. Finally, subtract your outgoings from your ingoings to see how much money you will have at any given time. For example, your biggest sales month may be in June, but this could be affected by the cost of hiring additional staff at that time.
Having this information on hand means you can look at spreading out big purchases and investments – such as staff hires, marketing campaigns or bank loans – so your cash flow is not negatively affected.
2. Renegotiate Payment Terms
For many small businesses, one outstanding debtor, or large invoice due before payment is received, can have a big impact on their business. Simple steps such as negotiating longer payment terms with suppliers and shorter terms with debtors can help.
Where possible, stretch out payables. Negotiate with your suppliers to pay them within 30 to 90 days. While not all vendors might agree to this, if you can stretch out some of your payables, this will give you more time to bill your own clients and collect receivables before paying vendors.
Introduce a payment policy to speed up the cash coming into your business. Keep your payment terms short to ensure you get paid as soon as possible, and clearly list your terms on all invoices.
Make it as easy as possible for your customers to pay you by offering a range of payment methods. Offering small discounts on early payments might also encourage your customers to pay sooner. On the other hand, you should charge interest to customers who pay late and remind them of your terms to avoid it becoming a regular issue.
3. Reduce Overheads
Negative cash flow is often found in fixed assets with ongoing monthly payments, such as vehicles and business equipment.
Look at leasing company vehicles and machinery instead of owning them outright in order to gain tax incentives and avoid having your cash tied up in depreciating assets. For example, Novated Leasing is a convenient and cost effective way to manage the cost associated with company vehicles.
There are myriad options available for leasing equipment, vehicles and machinery – an experienced finance broker can help you to review your options and secure the most suitable leasing arrangement for your business.
4. Invoice Factoring
Those managing a business that deals primarily with client invoices might consider factoring, also known as accounts receivables financing or invoice financing. Typically a solution for short term cash flow problems, the service allows you to sell your unpaid invoices or accounts receivable to a third-party invoice factoring company or bank, minus a service fee.
While you might not be getting a full return on your completed projects as you would if you waited until your net 30 or 60 clients paid up, many businesses see factoring as a good trade-off. It helps you get your hands on cash much more quickly, so you are able to meet your financial obligations and keep your business in a strong financial position.
5. Speak to a Broker
If your business’s cash flow is stifling its success and you’re looking for a solution, a broker who specialises in commercial and business finance with particular emphasis on cash flow solutions would be able to help. An experienced finance broker would know what is available in the market and be able to suggest the most appropriate finance solution for your business, whether that’s a business loan, cash advance or leveraging your business’s assets to secure credit.
An experienced finance broker can take a broad view of a business’s finance and look beyond a simple ‘lowest interest rate’ formula in selecting a finance product, ensuring that your will have access to the capital you need for your business, when you need it.