You could say that mastering the art of business cash flow can be compared to mastering the art of balance and equilibrium. It’s all about knowing what’s coming in, whilst managing what’s going out. Whether you’re an established small business or right in the start-up phase, having a clear understanding of cash flow is imperative and is the key to long-term growth.
Even if your business model is second-to-none, you’re showing signs of profitability and you have investors knocking on your door, you simply won’t survive if you can’t manage your business’s cash flow. Cash is the lifeblood for any business, keeping it afloat. If you don't have cash in the bank to support this, there’s a good chance your business will sink very quickly.
But why do businesses experience cash flow problems?
In 2018, Inuit QuickBooks commissioned a global study and found that half of the Australian small businesses who were surveyed admitted that they had lost $10,000 or more by foregoing a project or sales due to cash flow problems. So what are some of the mistakes that business owners can make? One misconception is that being profitable doesn’t always mean you’re cash-rich. As The Small Business Association of Australia explains, “capital is king when it comes to small business so, by hook or by crook, you must get that cash into your business if you want to keep your business going.”
In addition to this, growth doesn’t always equate to cash and perversely, strong growth is often a big contributor to cash flow stress. Whilst growth is great for any small business, there’s always a range of costs involved including staff costs, inventory, infrastructure, overheads and financing, which need to be taken into consideration and budgeted into the business forecasts. As a rule of thumb, the faster you grow, the more available funds you will need.
But what about sales? Another misconception is that sales equate to cash in the bank – this isn’t always the case. You might sell your goods or services to a business customer on credit, but there’s a very high chance they finalise that invoice months later. So what do you do then? Just because you’ve made a sale, it doesn’t mean they’re going to pay you straight away.
Managing business cash flow is a fine balancing act. Spending some time understanding and planning your cash flow is not only going to assist you with your day-to-day operations but will impact your business positively in the long run. We’ve put together four tips to help you master the art of cash flow.
1. If you fail to plan, you are planning to fail
Cash flow isn’t a guessing game and smart business owners are committed to forecasting their cash flow. Every month, business owners should aim to review their sales forecasts, operating costs and anything else that could be impacting their cash flow. Rolling 12 month cash forecasts are critical – they capture the seasonality of your business and highlight certain periods in the year where cash flow can be tight. For the uber-diligent business owner, these reviews could even be weekly – particularly if you’re in the startup phase. When doing this, don't forget to include ATO obligations including PAYG, GST and superannuation which are commonly overlooked.
Shortly after each period rolls past, it’s important to compare actual income and expenses to what was forecast. This will help to identify anything that might have been missed that, once included in your revised forecasts, will improve the accuracy of future forecasts. Even when you’re confident that all income and expenses are accurately included in your forecast, it’s important to carry out some scenario analysis. This will help you understand the impact of events that you don’t necessarily expect but might happen in the future. Some examples of scenario analysis could include – the impact on sales from losing your biggest customer, having large invoices paid much later than expected or a jump in production costs. It’s important to play around with a range of scenarios to identify those weak spots in your business. Focusing on these areas of vulnerability often minimises the impact of these events on the business, as you’re on high alert and in a better position to act early. It also highlights the need to have a solid contingency plan so these setbacks do not become fatal for your business.
2. Set up your terms, your way
As we mentioned in our best practice accounts receivable blog series, from the get-go, make sure your invoice terms are clear and well understood by your customers. A little bit of authority never hurt anybody – whilst we don’t want to upset customers, one of the biggest mistakes business owners can make is being too passive about overdue invoices, so it’s important to set the precedent from the very beginning. Xero actually recommends that business owners put together a ‘clever but polite invoice strategy’. One that’s direct, but fair. Don’t be that business that always gets paid late. And, if you’re one of those businesses that are struggling to get invoices paid on time, our previous blog outlines ways in which you can ensure they’ll get finalised a little quicker.
3. Keep on top of your business expenses
Cost control is critical for business. Whether it’s a start-up fighting to keep the lights on or an established business trying to expand margins, monitoring and managing your cost base is a key determinant of your business’s success. To give your business every chance of success, it’s important to review and adjust expenses regularly. You might be surprised to see how much cash can be saved when you carry out a line-by-line review of your business expenses including the many software subscriptions we add and then forget about with the proliferation of SaaS offerings. As Jared Hecht, CEO and founder of Fundera explains, “keep your eye on the bottom line and consider the cost-benefit of every single expense”. After all, every dollar you spend is a dollar you no longer have in the bank (so you might want to rethink that tropical fish tank for the office).
4. Always have a contingency plan in place
It’s imperative to have a contingency plan in place before any cash flow struggles start to happen. It’s here that you can work out your best back-up plan and avoid any unnecessary stress. But what might a contingency plan look like? Your business could have a rainy day fund, you could draw upon personal savings or even call upon family or friends. Other options might be to encourage customers to pay sooner by offering a discount, have an overdraft or line-of-credit in place, or use invoice finance to release funds from unpaid invoices.
Over leveraging your business with unhealthy levels of debt is a dangerous strategy as it can make even strong businesses more vulnerable under any adverse events. That said, a sensible amount of debt can help give a business the resources it needs to invest in growth and take advantage of attractive opportunities that might not have been possible.
Ready to master your business cash flow?
Mastering your business cash flow may not be easy but it should be a key area of focus for all businesses, big and small. And if your business could do with some extra cash to grow, Earlypay can provide you with a flexible line of credit that unlocks cash from your unpaid invoices. If you’re ready to set sail and discuss your options, call us today on 1300 760 205.