As a small to medium business owner, you know the importance of cash flow. It’s worth little to have hundreds of clients or customers lining up outside your store if you can’t afford daily expenses. Cash flow management, then, is more than a financial strategy, it’s the lifeblood of small to medium-sized enterprises. When you don’t have the luxury of accessible credit, effective cash flow management ensures that your business has the funds necessary for day-to-day operations, while also securing financial stability for long-term growth so you can expand and seize opportunities without hesitation.
Let’s Break It Down
A 2022 Xero report, Crunch: Cash Flow Challenges Facing Small businesses, highlighted that 92% of Australian businesses experience at least one month of negative cash flow, and the average period is an astounding 4.2 months per small business. It only shows that generating positive cash flow is not as easy as it looks.
We can think of cash flow management as a beautiful dance, choreographed with the movement of cash from 3 categories – operations, investments and financing.
Cash Flow from Operating Activities (CFO):
This is the most crucial type of cash flow, reflecting the money generated (or lost) from your core business activities. It considers all the cash inflows and outflows directly related to producing and selling goods or services. Here’s a breakdown:
- Inflows: Revenue from sales, collections from customer accounts receivable
- Outflows: Cash payments for expenses like inventory, salaries, rent, utilities, and taxes
Cash Flow from Investing Activities (CFI):
This category tracks the cash flow associated with your investments in assets and the sale of those assets. Here’s what’s included:
- Inflows: Cash received from selling property, plant, and equipment (PP&E), investments (like stocks), or intangible assets (like patents)
- Outflows: Cash spent on acquiring or upgrading PP&E, new investments, or intangible assets
Cash Flow from Financing Activities (CFF):
While you may not yet be at this stage, CFF reflects the cash flow associated with your financing sources, such as debt or equity. Here’s a breakdown:
- Inflows: Cash received from issuing new debt (loans) or equity (selling stocks)
- Outflows: Cash payments for repaying debt principal, dividends paid to shareholders, or repurchases of your business’ stock
A positive cash flow in each category means excellent financial health, whereas a negative flow requires that some special attention be paid to those specific categories.
So You Think You Can Flow?
There are many ways to manage the movement of cash to ensure positive cash flow all around. Just like flawless execution comes from practice, strong cash flow management is a skill honed over time. By regularly monitoring income and expenses, analysing financial data, and implementing strategies to optimise cash flow, you can refine your financial performance, and ensure your business continues to dance gracefully towards success.
- Forecast with precision: The ability to look ahead cannot be underestimated. Regular cash flow forecasts allow you to anticipate and prepare for future financial dips and peaks, ensuring you never find yourself backed into a corner. Tools like cash flow statements and projections provide a clear picture of financial health, enabling proactive adjustments to your spending and saving habits.
- Tighten credit controls: Clean up your customer credit by setting clear payment terms and enforcing them consistently. You’ll gain the respect of your customers and minimise the risk of late payments that disrupt your cash flow. Consider incentives for early payments and penalties for delays, making it beneficial for customers to pay promptly.
- Manage Payables: Where possible, strike a balance between negotiating longer payment terms with suppliers while taking advantage of any discounts for early payments. Mastering this technique ensures you keep cash longer while avoiding late fees, and you’ll maintain good supplier relations in the process.
- Review expenses: Practice makes perfect! With constant review, you can uncover unnecessary outflows that impede cash flow. Reducing overheads and cutting down on unnecessary costs can free up a surprising amount of cash, boosting your available funds without needing to increase sales.
- Build a financial buffer: Unexpected challenges shouldn’t disrupt your operations any more than a misstep would disrupt the flow of a dance. Being prepared with reserves and managing expenses efficiently allows you to adapt and improvise in the face of financial challenges, just like a dancer recovers from a stumble.
Looking for Outsourced Accounting You Can Trust?
Between sourcing suppliers, keeping customers happy and delivering outstanding products and services, managing cash flow can seem like running a whole other business. Expert teams with specialised knowledge can navigate these complex financial situations for you, keeping your business on top. You’ll not only gain valuable insights but also save on costs by eliminating the need for full-time accounting staff. This frees up your internal resources to focus on core business functions like innovation and growth.
Contact Vital Addition today. Our outsourced accounting team will help you master your cash flow management, empowering you to not only manage your finances but excel in a competitive marketplace. By employing strategic cash flow management practices you can stay on budget, improve financial stability and forecast revenue to secure more sustainable growth.