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Getting cash flow right from the start is important for any business owner.

As Symon Brewis-Weston discovers, a business is only as successful as its cash flow management practises so it’s important to understand how to get it right.

Poor cashflow management can bring down the foundations of any business, no matter how successful it may appear. So, whether you simply want to keep the business ticking over, or are planning to propel it to the next level, one of the easiest ways to reach your goal is by speeding up the cashflow cycle and streamlining your processes.

Efficiency really is the key to effectiveness when it comes to running a business; a little time invested now to get your finances in shape, could be the best investment you will ever make.

Back to basics

There are a range of variables that can impact the cashflow cycle and having the right levels of stock, the best payment facilities, well timed and organised accounts payable and receivables procedures, and the right types of bank accounts are at the core of successful cash management. Investing some time with financial advisors such as accountants, bookkeepers and business bankers to review these processes upfront will quickly set the business on the right path.

Keeping up-to-date and accurate financial records is also essential. These will not only help you keep track of all monies flowing in and out of the business, but will be useful further down the track if you need to seek additional financing or look to sell up.

Stock to sell

For most owners, inventory and wages comprise the major business expenses; they can also be among the most difficult to manage financially. It may sound obvious, but carrying excess inventory in the stockroom ultimately means less money in the bank. It also means that excess cash is being tied up in stock that could be diverted elsewhere across the business.

Every business is subject to seasonal fluctuations and stock levels should mirror this. Sales records will give a good indication of how much product is required each month and should be used to help you develop a tailored inventory order. This may be more time-intensive than lodging a standard monthly order, but in the longterm will be more cost-effective. It may also help to reduce unnecessary storage and staff costs, which would otherwise be required to manage the additional stock.

Paying up

When paying your suppliers, look at where you can make some savings. Paying on time is good business practice, but there is nothing gained from being too efficient with your payments and depositing money earlier than required. Remember, there is no penalty for paying bills on the day they are due, and the longer you leave the money in your account, the more interest it will earn.

Of course, it can also pay to negotiate early payment deals with suppliers, especially if you use a few regularly. Consider whether you can secure a discount for pre-ordering, or early payment.

Similarly, review your outgoings and think strategically about the timing of your payments. Make sure they aren’t all due at the same time otherwise you could be left short. Also, if you’re making large purchases that require periodic payment, try to structure these around other bills due in the same period.

At the most basic level, this could simply mean delaying the purchase for one week so that the bills will fall across different months. Alternatively, you could look for ways to make smaller payments more frequently. Leasing equipment instead of buying it outright could also be an option to free up cash that could be injected back into the business.

When it comes to wages, no small business can afford to be weighed down by excessive costs. However, it’s important not to sacrifice valuable personnel just to keep head count and costs down, as over time, talented employees will more than likely pay their way. If you’re a start-up business or experiencing a busy period, bringing in contractors can be a good solution as they won’t incur all the additional expenses and responsibilities associated with a full-time employee.

Cash in

When it comes to money coming in to the business, pricing and payment terms are the biggest influencers, and it can literally pay to get these right as quickly as possible. The key to pricing is to build in every cost associated with the product or service, including your own time, while ensuring that it reflects the market and is competitive. Your goal should be to make a good profit margin on your product or service, if you’re not, or if you’re not even breaking even, then you need to reassess your pricing strategy.

Simply put, the fundamental rule of successful cashflow management is to have more inputs than outgoings. If you aren’t generating this through your products or services, you will struggle across the rest of the business. Your business will also be put under strain if you don’t have an effective accounts receivable process in place. When it comes to collecting money from clients, timing is everything. Make sure you have clear agreements in place and issue timely, simple invoices with easy to understand language and payment terms. This is essential in getting payments processed quickly.

Always be alert

Instigating good cashflow management processes is the first step to driving a successful business, but it doesn’t stop there. The cashflow cycle needs constant attention through good times and bad. As many owners will attest, running a small business can be a bumpy journey, but being in control of your finances can help to smooth the path to success.

-Symon Brewis-Weston is executive general manager, Local Business Banking, Commonwealth Bank (www.commbank.com.au).

How to speed up your cashflow

1. Know the balance sheet inside out

Create a cashflow tracker, keep it up-to-date and consult it daily to keep on top of when income from sales will be received and what outgoings are scheduled.

2. Make the billing cycle work

All businesses are different, but subtle changes can have a significant impact. For example, billing a quarter of customers every week can bring a steady flow of funds into the business, rather than one mass billing at the end of the month. Similarly, implement electronic banking facilities or request to be paid by credit card so that customers get the funds into your account directly and quickly.

3. Unlock cash

Try not to have too much capital tied up in stock and equipment. Aim to turn over excess stock, even at a slight discount. Also, consider using leasing solutions for equipment instead of buying it outright.

4. Have a contingency

Cashflows can fluctuate throughout the year so it’s important to prepare for any financial shortfalls during slow business periods.

5. Make cashflow a team responsibility

People can be the cause of both peaks and troughs in the cashflow cycle. By educating staff on how the cashflow cycle works they will be better equipped to help you manage it.

6. Stagger outgoings

Aim to avoid multiple bills in one month. This can be achieved by using a combination of business credit cards, leased items, and periodic payments.

7. Every cent counts

Reassessing the pricing strategy doesn’t have to mean inflated price hikes, but it is important to ensure that pricing covers all costs, reflects the market and is competitive. Often, just a few cents increase can help release some of the pressure and help drive profits.

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Symon Brewis-Weston

Symon Brewis-Weston

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