It is essential for business owners to understand what cash flow is, and how to manage it. Profit and cash flow is not the same thing. Some businesses might be profitable yet have poor cash flow because they cannot collect payments from their customers. When there are extended periods of negative cash flow, even profitable businesses can fail.
What is cash flow?
Cash flow refers to the money that moves in and out of your business. Your cash flow is determined by:
- Cash in – When your customers pay you.
- Cash out – When you pay your suppliers.
Cash flows in when your customers pay for your products and services, while cash flows out when your business makes payments for expenses such as rent and stock. Cash flow can be positive or negative. The difference between cash in and cash out will determine if you have a shortfall or surplus cash. If your business receives more money than it spends, it is a cash flow positive situation. Conversely, if your business spends more than the amount coming in, the cash flow becomes negative.
Why is cash flow important?
Cash flow keeps business operations running smoothly. Without enough money coming in, you won’t be able to pay for things like:
- Purchases from your suppliers
- Your tax and super obligations
A lack of cash is a common reason why many small businesses fail. Access to other sources of cash like personal savings or a line of credit on a property might be necessary to overcome cash flow negative situations. Seasonal businesses will need to plan to manage their cash flow.
Some reasons for negative cash flow:
- You overextend credit to your customers. Although this gives your customers flexibility, you may find they are transferring their own cash flow stress to you. You will need to manage the payment collection. If your customers fail to make payment, your cash flow is negatively impacted. The longer the payment is left unpaid, the harder it is to collect, and the greater the impact.
- Failure to budget. If you don’t plan the timing of your spending, you might find yourself short of cash when the bills come in because your customers haven’t paid.
- Unplanned expenses such as equipment repairs.
12 Ways to improve your cash flow
Good cash flow management for your business involves keeping good control on the timing of cash inwards and outwards. Listed below are some ways to help you manage your cash flow.
- Know your breakeven point. This will help you focus on where you need to be to run a profitable business.
- Save cash for emergencies. Having surplus funds will help your business overcome periods where you have cash shortfalls.
- Use borrowed funds responsibility. Preplan on how to use the money to achieve your business goals.
- Collect your account receivables as soon as you can. You can encourage faster payments by offering additional payment options, direct debit, or a small discount for prepayment.
- Ask for upfront payments or take a deposit from your customers at the time of order.
- Invoice your customers quickly and have a systematic process to follow up on late payments.
- Extend your account payables until the due date rather than paying immediately.
- Consider if a line of credit or other bank finance is suitable for your business. It can help you overcome short-term negative cash flow or manage the peaks and troughs of lumpy payment timing.
- Prepare a cash flow budget. This will allow you to anticipate when your cash flow will be tight so you can prepare ahead of time.
- Track your business spending and look for ways to reduce expenses.
- Keep track of your stock. Overstocking will tie up your cash.
- Prioritise your bills. Paying your staff, suppliers, banks, and the tax office will keep your business running.
Business owners looking to grow their business must also consider cash flow issues that come with expansion. Growing fast creates cash flow pressure. Although you can sell more, you’ll also need to spend more on overheads, materials, costs of goods sold, and wages. If your sales cannot keep up with the expenses, you’ll face cash flow challenges that will ultimately cripple your business.
Maintaining a strong cash flow position is vital for any business. Contact Moiler for a confidential discussion on how we can help you manage and improve your cash flow.
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