With current economic conditions continuing to place stress on small businesses, here are 5 tips to help you manage your cashflow.
1. Learn how to read your balance sheet
A lot of business owners focus on their profit and loss statement and don’t look at their cashflow or balance sheet. You need to understand the significance of cashflow and how it keeps your operation afloat – it’s a potentially fatal mistake to focus on your profit & loss because healthy profits can mask an impending cashflow crisis.
To prepare a cashflow projection, you’re going to need a structured balance sheet. You need to look at all the influencing factors including debts, interest payments, inventory and your monthly commitments, these can be represented by a educated guess for the month.
2. Prepare your cashflow
You need to focus on forward planning to generate a “best guess” about likely future sales and expenses. This can be prepared in something as easy as Excel or your accountant can sit with you to help you through this exercise.
3. Review and update cashflow monthly
If you drive along looking down or in the dark without your lights on, you aren’t going to get far before you crash. Preparing a cashflow is your best insurance against potential cash shortages. Reviewing your cashflow each week for the first two months will allow you to make changes based on the current information at hand, making your forecast more accurate.
Be careful of rapid growth, which tends to catch business owners out, because ironically too many sales can cause issues. A sudden spurt in sales can result in a sudden spike in Debtors and can shift your cash inflow from 14 days to in some cases as far as 90 days. Continually focusing on sales and cash inflows will allow you to pay your creditors on time and keep them supplying you. By monitoring the businesses cash status you can determine if you need an overdraft or extended trading terms from suppliers to cover the temporary shortfalls.
4. Set out terms and get payments in quickly
Set out strong trading terms that show exactly your payment terms and time along with any interest that will be charged on late payments.
If there is one thing you need to become a master at, it’s Debtor management. Stay in close touch with debtors as payment deadlines approaches, do not wait until after your terms have expired before you start chasing your money. If you’re struggling to get money in offer small discounts for fast payments or look to employ a debtor finance company, such as premium funding.
5. Pay your bills strategically
Negotiate terms that suit you right from the start with your creditors. Make sure you read the fine print regarding late payments. Once you have a list, prioritise your payments into the most important like follows:- accounting fees, wages, super, tax, GST and then suppliers. The suppliers should be paid on their terms, but also in order of the most important to your business first. You do not want a major supplier to cut you off, as you won’t have stock to sell. If you’re struggling, contact your supplies and ask for an extension to pay.
Once you can see clearly where you’re headed, making decisions on spending money becomes much easier. You can also start to think about growing the business without the cashflow strain.