For any business owner, managing your cash flow is critical to ensuring it remains stable and sustainable. Effective cash flow management for your businesses is just as crucial as marketing or promoting your business.
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But while your main focus might be to work within your business to generate revenue, it is important to set aside the time to work ON it, too. And, more specifically, to improve your cash flow management.
But how do you do that? In this article, we will take a look at 10 essential strategies for effective cash flow management for your business venture. Put them in place and you should set yourself up for increased success.
Why is Cash Flow important?
Many people believe that a company's success is contingent upon its profits. However, profits alone do not accurately reflect the financial health of a business. Indeed, a company may report profits and still go bankrupt, or it may have decent profitability but struggle to attract investors or secure financing.
For this reason, cash flow is a better indicator of a company's financial well-being. Cash flow refers to the money coming in and going out of a business. Not only is it crucial for its daily operations, but it is also important for your ability to pay taxes, remunerate employees, purchase inventory and cover other expenses.
A positive cash flow shows that an organisation's liquid assets are rising. This enables it to reinvest in the business, pay off debts and fixed costs, provide dividends to shareholders and create a cushion to protect you from any future financial challenges your business might face.
Conversely, a negative cash flow indicates that a company's liquid assets are decreasing and puts them in a vulnerable position, which if it continues, can result in you spiralling into debt, stop trading or even having to file for bankruptcy.
1. Know your cash flow
You can't manage your cash flow effectively if you are not aware of what it is like. So, it is important for any business owner to regularly monitor and analyse their weekly in-comings and out-goings.
Doing this will give you a firm indication of your company's financial health and also enable you to develop more strategic plans around it. Whether you do it on a weekly, monthly or quarterly basis, you should generate reports that indicate if you are consistently making money or losing it.
Once you go through them, don’t overreact to the odd week where you might have incurred a significant deficit. Instead, identify trends over a prolonged period of time, which will help you determine if your business is strengthening or weakening.
2. Spend less
Once you have a handle on the current state of your cash flow, you can start to look at opportunities where you can cut down on your expenses, which in turn will immediately improve your finances.
It is worth doing a complete audit of your business to establish what areas you may be able to reduce costs in. Some of the questions you should ask yourself are: Can you save money on rent by moving elsewhere? Can you find cost savings by switching utility providers? Is there a way you can reduce the payroll?
You should also look at whether there are any loans or leases that you can refinance or renegotiate, whether you can enjoy economies of scale by ordering bigger bulk quantities of products from your regular suppliers and cancelling insurances, subscriptions and services you may no longer need.
3. Generate some quick cash
To get yourself back toward a more even financial footing or to give yourself a bit more breathing room, it is worth implementing measures to generate some quick cash.
One of the best ways to do this is to offer any excess stock you have at a cheaper price in a flash sale. You should also consider selling any tools, machinery, equipment or anything else you are no longer using.
Additionally, if you have a record or database of all your customers from the last five years, it would be worth reaching out to them via phone or email to see if they require any product or service you offer.
4. Send the Invoice Immediately
Many businesses wait until they have completed the work or delivered products to their customers before sending out an invoice. Yet, sending the invoice out as soon as the order has been placed or the job is confirmed is an excellent way to reduce the length of time before you get paid.
When it comes to sending out the invoice, make sure you know who to direct it to and what their correct contact details are. (Email is much quicker and cheaper than traditional mail, so you should send it out to them in this way to save time and money).
Also, make the invoice as clear and concise as possible and outline all the ways you accept payments, for example, bank details for EFT payments, BSB and reference number for BPAY, etc. That way, you reduce some of the unnecessary delays that you might experience from customers.
5. Get Paid Quicker
There are several ways you can get paid quicker. If you currently offer trading terms of 28 days, you should consider immediately changing to 7 days or cash on delivery.
Additionally, you should think about getting a portable EFTPOS machine or a phone app that will enable you to accept instant payments by visa or credit cards either in your office, at a trade show or exhibition or when you are delivering product.
Another way to get paid quicker is to incentivise customers to do so. This could involve getting a 10% discount if they pay in full before the job is completed. Alternatively, if the amount they will be spending is sizeable, you can insist on them putting down a 50% deposit to be paid prior to the work starting.
As time is money, once you have been paid, it is worth prioritising that work or order to get it off your books.
6. Build your cash reserves
To really get a handle on your cash flow management you should set up an emergency fund.
Ideally this should be between three to six months' worth of cash that can cover all of your expenses should you suffer from a significant downturn in sales – for instance, like when the Covid-19 pandemic hit.
The best way to do this is to open an account, such as a Moomoo cash management account, where you can put cash away for a rainy day.
It might seem a struggle at first but developing the habit of saving a portion of your regular income every week, may well hold you in good stead later down the line should your business experience a temporary struggle.
7. Implement tighter measures for stock control
When it comes to managing cash flow it is important to get a handle on your stock control because you will want to avoid a situation where you don't have enough capital to dig you out of a financial hole due to ordering too much stock.
To avoid this happening, it is worth understanding how long it takes for you typically to receive new stock from your suppliers and then develop a system where you don't order it too early or leave it too late, based on their lead time for delivery.
It might take you a bit of time to set this up and understand the process but once you do, it should ensure you don't have too much in the way of excess stock.
8. Lease instead of buy
Although it is good for a business to own assets, if your cashflow is struggling, it can sometimes make financial sense to lease and not buy equipment, for instance, vehicles, machinery or IT equipment.
These items can be quite costly to purchase outright and often involve high interest payments or upfront outlays. Subsequently, by leasing them you avoid spending sizeable sums of money in the immediate term.
Your business can also potentially benefit from state-of-the-art features that newer makes and models might have over the ones you would have purchased. Hence, adding extra value to your operation in terms of speeds and efficiency.
9. Cut out the emotion
As a business owner, best practice cash flow management means you have to be open, honest and realistic about the state of your company. To do this, you need to cut out your emotional attachments to it.
For instance, if you find that your sales have dropped but your expenses are spiralling you will need to disassociate with any positive associations you have with a certain aspect of your business and determine whether it is still viable moving forward.
To improve the financial position of your company, you need to have your clear and sensible hat on. There is no room for sentiment when you are making financial decisions that can affect its overall performance.
10. Hire a business advisor
If you really find your company struggling to maintain a good cash flow, you can always call in the professionals. There are several business advisors that specialise in helping companies improve their financial position through implementing cost cutting and strategic measures.
Just make sure you do your due diligence in terms of research before hiring anyone. Specifically, confirm their credentials, note their presence on LinkedIn and check out the Google reviews their other clients have left for them.
Effective Cash Flow Management for Your Businesses – Bottom Line
Effective cash flow management for your businesses is a critical factor, but it is not something to be afraid of. So, embrace the steps outlined above and do everything you can to work towards streamlining your operation.
The thing about cash flow management is that most of it involves clear, rational and strategic thinking. If you employ this, you should go a long way to navigating yourself to a stronger financial position.
At the end of the day, every business that is flourishing is doing this, in large part, because they have an excellent handle on their cash flow management. So, if you can get a hold of it for your business, you should soon be looking forward to growing with increased confidence.
