In any business, cash flow is king. A healthy profit on paper doesn’t pay the bills, and neither do the assets or equity in your business.
To help safeguard against inadequate cash flow or high cash use, here are some tips to keep more money flowing into your business than out.
1. Monitor your cash flow
Prepare annual, quarterly and monthly cash flow projections and closely monitor your operating expenses, overheads, stock levels, debt collections and profit. An accountant can help review your cash flow to highlight areas you may have overlooked, and plan for potential cash flow problems.
2. Tighten payments
Receiving payments faster will boost your cash flow. One of the easiest ways to speed up your payments is to send invoices immediately after the delivery of goods or services. You may also want to consider shortening payment terms, particularly if they are longer than 30 days.
A mobile EFTPOS device can give your customers an easy way to pay on the spot no matter where you are, removing invoice time lags.
3. Stick to terms of trade
Set out clear payment guidelines for your customers and consider reviewing your supply terms if a customer regularly fails to pay on time. Think about offering a discount for early payment or put a statement on your quotes and invoices indicating that you reserve the right to charge interest on overdue accounts.
4. Know your customers
All companies have different payment habits. Some pay everything on the same day each month, while others pay on an ad-hoc basis. It’s worthwhile getting across your customers’ payment practices.
5. Utilise payment times
Similarly, work with your creditors’ payment terms to improve your cash flow. For example, if a payment is due in 30 days, don’t pay it in seven days unless there is a discount for early payment.
Using a business credit card to pay suppliers can be a way to manage cash flow while taking advantage of interest-free payment periods.
6. Separate accounts
Separating your personal and business finances can make it easier to keep track of your business cash flow.
Opening a separate business savings account will allow you to earn interest on your cash while still leaving funds accessible when you need them.
7. Review inventory
Do regular inventory reviews to hold only as much stock required to run your business efficiently. Excess stock can tie up cash and increase storage and insurance costs.
8. Cash crunch management
Cash shortfalls can happen to any business, and a credit facility such as an overdraft can help cover operating expenses temporarily. This can be effective way to meet short-term working capital requirements when cash flow is low. If used wisely, the interest should be relatively low because the business only pays interest on what it borrows for a short period.
If you need to make a larger purchase, a business loan can minimise cash flow impacts and provide flexibility. For example, with a BetterBusiness Loan you can access any additional repayments you’ve made via NetBank or CommBiz.
Your business banker can help answer questions about things you need to consider such as fees, interest rates and payment terms.
Cash flow warning signs
Your cash flow cycle is likely to be slowing if:
- Your suppliers go unpaid for more than 60 days
- You regularly have disputes with suppliers or change suppliers
- You often lodge your Business Activity Statement (BAS) late
- Your employee super payments are in arrears
- Suppliers insist on cash-on-delivery.