"Be proactive, never assume anything, always test and keep learning."
Staying on top of cash flow is often a tedious task of checking your bank account, skimming over your receivables ledger and checking when you have to pay the bills. Many small business owners struggle to keep a clear understanding of the liquidity of their own business. Remember just because you are driving new business sales, if you don't have cash in the bank to support the ever increasing capital demands of a growing business, your business can capsize without warning. There are many Australian small businesses who have adopted simple cash managment techniques to guarantee their liquidity and growth. Check out a great example of one such business here.
Before drilling down into the 9 simple cash flow tips we have collected from various Australian businesses, there is one key business management philosophy to keep in mind when executing on these tips.
Here we go!
# 1 Align your payables and receivables terms
The perfect business has extended terms with their suppliers and short payment terms with their customers. Many businesses are not fortunate enough to enjoy such a situation. It is an imperative that your business has strict and clear agreements with suppliers and customers so you can negotiate and adhere to payment terms.
- Negotiate discounts that justify paying early.
- Agree on an exclusivity arrangement to guarantee order volumes, price and terms. This will provide more consistent cash flow control.
For customers, negotiations are similar but require more tact to retain strong customer relationships:
- Negotiate an early payment discount that is not detrimental to your gross margin.
- Enforce interest charges for late payment; to be used with caution as it is hard to actually charge and it impacts the relationship.
- Agree longer payment terms for a higher price; this last option, complemented by using finance, can provide you bargaining power and margin uplift.
#2 Plan and forecast your cash needs
Review your sales pipeline, related costs, one-off capital expenses and any other amounts that will influence the business’s cash flow over the next 1, 3 and 6 months. Build out a cash flow budget using different scenarios and stress test them to ensure you are aware of the key factors that can impact your financial position. Review cash flows on an on-going basis to ensure departments are achieving forecasts.
#3 Determine your biggest expenses and slash them!
You’d be amazed how much cash can be saved when you review costs of goods, costs of sales and overheads. Do you really need to undertake all your work internally, or could you outsource some of it and save money?
#4 Review your payroll costs
Employ people based on your current needs not the future. Investigate moving some staff to contract employment to create a more nimble workforce.
#5 Revisit your office occupancy
Understand each employee’s role in the business and their daily movements. Gauge if everyone needs a desk. Can they work from home sometimes? A hot desk office layout can save on space and improve work culture.
#6 Re-evaluate your taxes
Make the most of your accountant! There maybe opportunities to reduce your tax or access tax incentives schemes. There are various government schemes and grants for SMEs to capitalise on.
#7 Use finance
Finance is often seen as the backstop tool to cover the misalignment between payables and receivables. If used correctly, it also serves as a growth tool. Invoice finance can give a business the flexibility to accelerate invoices payments to cover those shortfalls but more importantly use cash to tender for bigger projects, order more stock or hire more staff. The cost of funding is typically incremental to the return on investment for every dollar if controlled correctly.
#8 Implement a clear credit control structure
Once the invoice is out the door, your work is not complete. All businesses are very busy and in need of cash flow so their supply chain is the first port of call for cash. Don’t let your customer payments slip. Ensure you have correct contact details, clearly stipulated payment terms and a proactive reminder schedule. Don’t get your sales team to ever chase payments. They are the “good cop”, accounts payable can play “bad cop” if required.
#9 Use tools to automate
There are a plethora of tools now available to help a business forecast, control and optimise cash flow. You can use online tools to forecast cash flow with a few clicks. You can automate your credit control. Create a box of tools for your team to manage cash flow more efficiently so you can focus on growth!
Look at your cash flow each month as a growth opportunity for your business. Do what’s right, the right way, at the right time and you will effectively grow a kick-ass business. It is all about the little things when managing small business cash flow of a company. Do you have any tips and tricks that have dramatically improved your business cash flow?