In this week’s edition of Let’s Talk, we’re tackling a critical business issue: cash flow management.
Poor cash flow can be a major obstacle to success, but with the right strategies, you can improve your financial situation and avoid financial difficulties.
Our experts dive into practical tips and actionable advice to boost your cash flow and ensure the long-term viability of your business.
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Jo Burston, Founder and CEO at Inspiring Rare Birds
“Managing cash flow is essential for small businesses, ensuring financial obligations are met and growth is supported. A key part of this management, especially in Australia, is understanding tax cycles and practicing financial discipline. Here are some key tips:
- Monitor Cash Flow Regularly: Track income, expenses, and receivables weekly or monthly. This helps identify potential cash flow issues early.
- Understand Tax Cycles: In Australia, businesses must manage GST, PAYG, and BAS lodgments. With the financial year running from July 1 to June 30, setting aside monthly tax funds prevents cash flow disruptions.
- Negotiate Payment Terms: Improve cash flow by negotiating shorter terms for accounts receivable (AR) to get paid faster. At the same time, aim for longer terms on accounts payable (AP) to give yourself more flexibility with outflows.
- Understand Cash Flow & Balance Sheet: Your cash flow impacts key items on your balance sheet, such as assets, liabilities, and equity. A strong cash position ensures healthier balance sheet metrics, affecting your business’s financial stability.
- Avoid Using Business Funds for Personal Expenses: Keep business and personal finances separate. Pay yourself a salary but avoid using company money for personal expenses.
- Invoice Promptly and Manage Expenses: Send invoices immediately and regularly review expenses to ensure they align with business goals.
“By understanding tax cycles, cash flow’s relationship with the balance sheet, and maintaining discipline, small businesses can achieve sustainable growth.”
Glenn Norton, Partner (Business Services) at Findex
“Operating without sufficient cash reserves is akin to driving a car with an empty fuel tank. Various factors can contribute to cash flow challenges for SMEs, including rising rent, utilities, wages, slow-paying customers, seasonal demand, and high interest rates. Effective liquidity management demands vigilance and strategic decision-making.
“Below are key tips for SMEs to improve cash flow effectively:
- Maintain accurate cash flow forecasts and be realistic about your revenue and expense projections. Anticipate changes in consumer demand and market conditions, budgeting for unexpected expenses.
- Keep a close eye on overdue invoices and implement proactive measures to expedite collections, thus avoiding cash flow bottlenecks.
- Maintain a balanced approach to managing accounts payable to avoid strain on vendor relationships. Refrain from seeking short-term cash flow relief, such as delayed payments, which often lead to penalties or service disruptions.
- Develop contingency plans and stress-test your finances to mitigate potential risks. Anticipate seasonal fluctuations and potential of an increase in operational costs by establishing reserves or adjusting staffing levels.
- Regularly review financial reports and key performance indicators to stay informed, ensuring you’re responsive to changing circumstances and proactive in addressing cash flow issues.”
Alan Manly, CEO of CampusQ and author of The Unlikely Entrepreneur
“The golden rule for the practical business manager is a simple mantra being “cashflow, cashflow, cashflow.” Company structures that support the culture of cashflow management, reported on a daily basis via reports available to key staff, develop a team approach to the life blood of the company. Staff morale is inevitably improved when senior staff are not subjected to ambush meetings when the “financial difficulties “ are announced and a form of panic develops. Staff working for a company that have financial issues professionally managed are inevitably more confident to invest their time and emotion in to the their goals that grow the business.”
Beau Bertoli, Co-Founder and Chief Revenue Officer at Prospa
“Despite a modest rise in short-term business confidence, small businesses are facing a long-term decline in optimism. According to a recent RFI survey commissioned by Prospa, less than half (41%) of small business owners feel confident about their prospects over the next 12 months, dropping to 32% when looking five years ahead.
“With inflation, rising costs, and decreased consumer spending weighing heavily on profitability, two in three businesses – particularly those in hospitality and construction – are experiencing severe financial stress and burnout. What’s more, two-thirds of small businesses have less than two months of cash reserves, leaving them especially vulnerable to economic uncertainty.
“Given these pressures, managing cash flow effectively is critical to survival. A proactive approach, such as considering a line of credit for a safety net of funds to use as needed, or using financial tools like the Prospa App, Xero or Bill Pay to stay on top of spending to future-proof their business finances.
“In an unpredictable economy, SMEs that keep cash flow front of mind will be better equipped to weather both financial curveballs and economic uncertainty.”
Chris Dahl, Co-CEO at Pin Payments
“To improve cash flow, SMBs can leverage digital solutions like PayTo, a cutting-edge payment system developed by Australian Payments Plus in collaboration with the industry. PayTo allows businesses to process direct debit payments faster and more efficiently, automating the process and reducing delays. This enables better control over cash flow, helping you meet financial obligations on time and reducing the stress of waiting for late payments. Whether used for in-app purchases, ecommerce, or ad-hoc transactions, PayTo integrates seamlessly across platforms.
“Unlike traditional methods, PayTo streamlines payment processing by minimizing manual intervention, allowing SMBs to manage finances more efficiently. This ensures quicker access to funds and the ability to reinvest in your business sooner. Offered by many financial institutions and fintech companies, PayTo is accessible and helps businesses maintain financial stability, even during uncertain times. Check with your payment provider or bank to see if PayTo is available for your business.”
Nathan Reichstein, Chair, Business Advisory Committee and Director at Moore Australia
“A three-way forecast incorporates a forecast of the profit and loss, cash flow and balance sheet and is used by many businesses in their ongoing annual budgeting processes. Good forecasting can also provide a holistic view of the impact any changes will have on the business’ bottom line by testing various scenarios. Some of the things you can be doing to improve your cashflow in the short-term include:
- Debtor management:
- Consider offering discounts for prompt payment.
- Ensure any payment arrangements with debtors are followed up on the due date.
- Consider using an external debt collection agency to assist.
- Look into offering clients external finance on their debt so that you receive the cash sooner.
- Stock management:
- Review your stock levels for slow moving or obsolete stock
- Offer discounts for slow moving stock.
- Review whether the reorder point for stock is still the same – are there delays in your supply chain or is it that stock is moving slower so there is less urgency to re-order?
- Capital investment requirements:
- Do you expect that you will need to spend on infrastructure and assets in the coming months? This may be as a result of changing the way you do business i.e. more online and virtual contact; maybe a different product is being developed.
- How will these items be financed? Bank debt; new investors; existing cash sources?
- External sources of finance:
- When you look at all of your costs and then the expected revenues, is there going to be enough cash coming in to cover these? If not, how can this be financed?
- Is it time to bring in a new investor with a cash influx?
- Did you have extra cash in your own resources to lend or contribute to the business.”
Sean Wiles, Partner at McGrathNicol Advisory
“Improving cash flow starts with a disciplined approach to working capital management. The shorter the working capital cycle, the faster the conversion of earnings to cash. This, in turn, increases liquidity and provides management teams with options during tougher trading conditions. The challenge is often managing all parts of the cycle as efficiently as possible, at the same time.
“For example, debtor management must start from the moment work begins, not when unpaid invoices fall overdue. Agreed procedural steps, increased contact with the customer before the invoice due date, and an understanding of customers’ payment cycles to ensure bills are sent at the right time are helpful measures.
“On the supplier side, whilst paying late or stretching creditors can provide an immediate cash flow benefit, this approach is not sustainable and can cause stress along the supply chain. Instead, regular review of supplier terms and aligning these as best as possible with customer terms helps to avoid ‘funding gaps’ in the working capital cycle.
“By clearly setting out the steps in the procurement-to-pay cycle and assigning responsibilities, SMEs can ensure suppliers are paid on time (without needing to pay early). Rolling 13-week cash flow forecasts in receipts and payments format will also help management teams identify any cash flow constraints or funding issues early.”
David Price, CEO at Peninsula Australia and Peninsula New Zealand
“It’s no secret that business conditions for SMEs in Australia are tough at the moment, with rising operating costs and slow economic growth making it difficult for many businesses to stay afloat. However, there are several steps you can take as a business owner to help ensure your operations aren’t just sustainable, but successful too.
“In identifying areas where cash flow be improved, start by assessing your income statement and balance sheet to get a comprehensive understanding of where money is going, as well as where it’s coming from. The sooner you can recognise signs of trouble, the quicker you can address them.
“Look for areas where costs can be cut without sacrificing quality. For example, check if supplier contracts can be renegotiated – especially if you’ve been a loyal, long-term customer – or if other vendors are offering a better deal.
“If slow collections and growing accounts receivable are becoming a problem, it may be a good idea to offer early payment discounts to incentivise faster payments from clients or customers.
“Sometimes, adversity necessitates innovation. Evaluate your business model against current market demands, which may reveal new avenues for revenue that better align with current consumer behaviour.”
Nikki Booth, Director & Financial Advisor at My Wealth Solutions
“Cash flow management is the cornerstone of financial health. It’s about ensuring that your income exceeds your expenses. This balance allows you to save, invest, and avoid financial stress.
“The first step is to track your income and expenses carefully. This involves listing all sources of income, such as salaries, investments, and government benefits, and categorising your expenses. Once you understand your financial picture, you can identify areas where you can cut back on expenditure or increase your income.
“The next step is creating a budget. This gives you a financial roadmap to allocate your income towards specific goals. By creating a realistic budget, you can prioritise your expenses, save for emergencies, and work towards achieving your financial objectives.
“One effective strategy for improving cash flow is forced savings. This involves automatically setting aside a portion of your income each month. By making saving a priority, you can build an emergency fund, reduce debt, and achieve your long-term financial goals.
“Tips for Effective Cash Flow Management:
- Reduce unnecessary expenses: Identify areas where you can cut back, such as dining out, subscriptions, or entertainment.
- Increase your income: Explore opportunities to earn additional income, such as freelancing, part-time jobs, or selling unwanted items.
- Negotiate bills: Don’t be afraid to negotiate with service providers to get better deals.
- Avoid debt: Use credit cards responsibly and avoid accumulating high-interest debt.
- Seek professional advice: If you’re struggling with your finances, consider consulting with a financial advisor for personalised guidance.
“Improving your cash flow is one of the fastest ways to reduce financial stress, and build a stronger financial future for your business and yourself.”
Luke Fossett, General Manager of Australia and New Zealand at GoCardless
“SMEs have faced a tough few years, navigating challenging economic conditions while recovering from the pandemic. According to the Council of Small Business Organisations Australia, 57% of business owners are stressed due to financial pressures, with many struggling to pay their own outstanding costs. Keeping cash flow healthy is essential to avoid financial difficulties, so I recommend focusing on two key areas: tackling late payments and updating payment options.
“Our Pursuing Payments Report reveals that over half (55%) of business leaders are concerned about late-paying customers due to rising living costs. This issue can ripple through the supply chain, as late payments from big businesses impact their suppliers, causing them to pay their own suppliers late. To manage this, set clear payment terms and closely monitor pending invoices. This proactive approach helps you follow up on overdue payments and stay on top of cash flow.
“Updating your payment options can also make a significant difference. Offering flexible solutions, like instalments, and implementing Direct Debit can accommodate various customer needs. These strategies speed up the payment process and enhance your control over cash flow, allowing you to focus on growing your business with confidence.”
Fleur Allen, Business Success Coach, Ask Fleur
“Keeping your financial records up to date and accessing weekly reporting is essential to maintaining healthy cash flow and avoiding financial challenges.
“The key is to establish a system that works for you. Personally, I prefer to ‘face the music’ on my financial reporting every Friday. This ensures I have accurate weekly cash flow reports.
“By reviewing your cash flow weekly, you can make informed decisions about your business’s financial health. Once you have an accurate picture, you can make a plan to respond to this report, either later that afternoon or first thing Monday morning. This could mean following up overdue invoices or checking your expenditure.
“A critical component of this process is having a sales system in place to increase revenue if needed. Make sure you have a follow-up process in place, especially including an email and phone call follow up steps to enquiries to the business, to ensure steady cash flow.
Ms. Allen emphasises the importance of forecasting income for the upcoming week. “This ensures you’re well-prepared to handle your business expenses and avoid financial surprises,” she concludes.”
Angus Sedgwick, CEO of OptiPay
“Effective cash flow management is essential to ensuring your business can avoid financial difficulty and instead thrive. Every business owner should have a cash flow forecast that identifies potential shortfalls or busy periods when cash is likely to be tight. Knowing when your cash inflows and outflows are at their highest can help you put in place strategies in advance to cope.
“Top cash flow strategies for business include:
- Taking charge of late payments – utilise cloud based accounting platforms to schedule reminders throughout the invoice payment cycle. Pick up the phone and call debtors if needed.
- Reduce your spending – regularly review your outgoing expenses to see where you can reign in costs.
- Manage inventory – a common cause of cash flow problems is excess stock lying around leaving valuable cash tied up for months on end. Do regular stock takes to ensure consistent turn over.
- Unlock your unpaid invoices – a great solution for B2B businesses is invoice financing which allows them to be paid up to 90% of an outstanding invoice value upfront. When your customer pays and the funds are received by your debtor finance provider, they’ll remit the remaining 10% minus a small fee to compensate for early funding.”
Steven Nicholson, Founder of GearChange Business Advisory
“Not a day goes by without another media story about businesses getting into financial difficulties due to insufficient cash flow. Focus on these two areas to avoid such problems:
- Cash flow forecasting
When cash flow is tight you need visibility of what’s coming in terms of cash inflows and outflows. This comes from your cash flow forecast, a tool every business should have. It will highlight when cash flow gets tight – BAS, super payments, wages time. Visibility enables you to make decisions to manage cash flow through these periods. - Optimise working capital
Reduce cash tied up in debtors by not giving more credit than you must and chasing outstanding amounts owed. Send reminders and statements to all customers. Reduce cash tied up in inventory by only carrying what you must. Maybe buying more frequently is better than buying in bulk? For services businesses, reduce WIP by billing in stages and quickly at the end of each job.
Extend your purchasing cash cycle by negotiating better credit terms with suppliers and only paying when invoices become due.
Outsource to the experts if you don’t have the time or expertise to do this yourself. Your business will thank you for it.”
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