Effective cash flow management is an essential part of business success. Here are some key tips to getting it right.
1. Know the balance sheet inside out. This is an obvious, but often overlooked, necessity. Making a sale is not the end of the cash flow cycle. It is important to know when the cash from a sale will be received. In addition, knowing when you have to pay for goods and services is important in balancing cash flow.
2. Source the right funding. There are various types of funding available to help maintain the flow of cash through a business, including business loans, asset finance and receivables finance, credit cards and overdraft facilities. Choosing the right source of funding for each purpose is crucial and a business banker or accountant will be able to help business owners choose the right option to fulfil their requirements. Remember, avoid using cash generated from sales to purchase business assets as ultimately this will drain the fuel that keeps the business running.
3. Prepare for seasonal variations. Cash flows can fluctuate throughout the year so it’s important to prepare for any financial shortfalls during slow business periods.
4. Pay on time to negotiate discounts. Processing invoices and collecting debts is expensive and time consuming for all businesses. Help reduce cash shortfalls by negotiating a discount for prompt payment with key suppliers. If business owners can guarantee on-the-day payment by direct debit, they should be able to get a five percent discount.
5. Streamline the supply chain. Don’t buy the same thing from multiple suppliers as this is inefficient and time consuming, and also limits the power of negotiation. Using just a few key suppliers will maximise bargaining power and simplify purchasing.
6. Roaring sales don’t signal an end to prudent cash flow management. A jump in sales can sometimes have an unexpectedly negative affect on cash flow. Increased sales require increased inventory which, in turn, ties up more cash in stock and ultimately can result in a squeeze on cash flow
A growing business is just as likely to run into cash flow difficulties as a failing one if the situation is not properly managed. Understand the consequences of growth and obtain credit in advance.
7. Consider the terms of credit. State the credit terms of the business carefully. Look at industry norms and assess if a change in your credit terms will suit your business. Reducing these may lose some customers, but the majority paying faster may compensate for this.
8. 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, sending pre-addressed and stamped remittance envelopes may seem like an insignificant step, but can shorten repayment times and bring money into your business faster.
9. Don’t wait to deposit cheques. A cheque sitting in a desk draw isn’t doing anything for the business. Deposit cheques as soon as they are received to inject funds into the cash flow cycle immediately. Ideally, request to be paid via credit card or electronic funds transfer to avoid the time-lag incurred by cheque transactions.
10. Don’t be afraid to outsource. Outsourcing a non-core business function may seem like an unnecessary expense, but it could actually have a positive impact on the business’s cash flow in the longer-term. It will free-up time for business owners to concentrate on tasks essential to improving and growing the business, ultimately bringing more cash into the cycle.
Source: Commonwealth Bank Local Business Banking team. Visit commbank.com.au/cashflow to download a free cash flow solution kit and cash flow tracker.