7 tips for managing your business cash flow

Working capital is the money your business needs to finance its day-to-day operations. Cash flow problems exist when there isn’t enough working capital in the business to cover costs while you’re waiting to be paid.

When unexpected bills arrive, they can have a challenging impact on your business cash flow. You may find yourself dipping into your personal savings or taking out additional finance.

But with a bit of planning, you can help make sure you’re ready for unplanned expenses. Here are seven tips for managing your cash flow that can help take the sting out of unexpected costs:

1. Create an emergency fund

While we like to think we know what’s ahead, it’s impossible to predict every expense your business may face. Broken equipment, staff shortages or a new opportunity can put pressure on your working capital and create a cash flow gap.

One way to plan ahead is to create an emergency fund that you add to with regular payments. Then when unexpected costs arise, you’ll have some extra funds at hand. Around three months’ worth of funds is usually a good goal to aim for.

2. Monitor your cash flow

Are you constantly waiting for money to come in before you can pay your bills? Then you might want to keep a closer eye on your cash flow debt management. A cash flow forecast can help you understand the size and timing of outgoing and incoming payments. You can also calculate your cash conversion cycle to improve your cash flow efficiency.

Preparing cash flow forecasts can help you get a more precise estimation for how large your cash buffer should be. Cash flow forecasting can also help fine tune your business strategy, predict lean periods and take advantage of sales opportunities.

Use the cash flow view in the CommBank app to see a monthly summary of your incoming and outgoing cash flow on eligible business accounts, at a glance.

3. Check that you’re being paid

It’s an unfortunate fact that some customers don’t pay until they have to – while others need a gentle reminder. Staying on top of invoicing can help ensure you have enough money in the bank to cover your expenses, helping reduce any cash flow gaps.

Offering different payment options can make it easier for some clients to settle their bills, for example, using a mobile eftpos machine or payment in instalments. You could also consider incentives for on-time payments, or charge interest if payments are late.

4. Examine your supplier relationships

If you have good supplier relationships, you may be able to extend your payment terms with them, enabling you to hang on to your cash for longer. See if there are any periods where you sell more or less than usual – and adjust your inventory purchasing to match. You should also check the current market price of what you’re procuring – and ask your suppliers if they are willing to match a competitor’s price.

5. Adjust your business model

Perhaps you’re not charging enough for your product or service or not selling them fast enough to cover your costs. These types of issues may require a rethink of your business model, including trimming costs, changing your distribution approach, or raising your price.

6. Look at alternative financing options

Having extra finance in place for when you need it can be a good way to cover unexpected costs – and help you sleep better at night.

A business overdraft facility is a pre-agreed amount you can use if your account falls below zero – so you don’t default on critical payments. A business credit card could also be a good option. But because they often charge a higher rate of interest than other finance types, they’re best kept for short-term emergencies.

7. Adopt invoice financing for a longer term solution

Invoice financing is a flexible funding method that lets you borrow money against the amount due on invoices you’ve sent to your customers that haven’t been paid yet. Because these invoices are used as collateral on the loan, you don’t need any additional security.

Invoice financing offers a lower interest rate than many other financing options. It is also scalable – your borrowing power increases with the value of your invoices, so you can borrow more as your business grows. Better yet, with CommBank’s invoice financing solution, there is no complex fee structure and you’ll only pay interest on the funds you draw down. The facility is also available 24/7.²