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7 steps to understanding and managing cash flow for small business

7 steps to understanding and managing cash flow for small business
December 27, 2019 va-admin

You can’t manage something you don’t understand. So what exactly is business cash flow? Cash flow is simply the movement of cash in and out of your business in a given period of time.

It’s one of the most important, yet neglected, areas of business. “Insufficient cash flow is crippling Australia’s small businesses,” explained Kochie’s Business Builder’s Managing Editor, Ces Busby, in May 2019 “with close to half of business owners reporting they have been at risk of not meeting payroll obligations in the past twelve months.”

Effectively managed, it can allow you to have enough capital to continue to operate through slow or quiet periods, and can be the key to the survival of your business in the long term.

Keeping your finger on the pulse of your business cash flow will mean you have more control over your future spending, enabling you to make better decisions and have a clearer picture of which direction your business is taking. Having core cash flow management strategies in place is also critical to business growth and development.

Positive cash flow is a sign of a healthy business. It will also give you the ability to deal with unexpected events (or costs), and hopefully the confidence to grow your business.

We’ve compiled our top 7 steps to improving your business cash flow below:

  1. Invoice immediately. Don’t wait. A product or service delivered is cash in the bank. Almost! When providing a service, consider including a requirement for a deposit, or a payment partway through as part of your terms of agreement. It’s now common practice and can make a big difference to positive cash flow.
  2. Keep your numbers up to date. Don’t let them get away from you. Keep on top of your accounting (or engage someone who will), so you can see where your business is at a glance at any time.
  3. Be direct and honest with your customers. Your invoicing policy should be clear cut, but fair. Don’t be too lenient with your business clients. If you are offering credit, check your accounts receivable turnover regularly. If an imbalance results, address it quickly with the client in question, and revisit and revise your processes.
  4. Keep your accounting simple. If you aren’t confident, engage an accountant. You need to know where your cash flows to, so you can take advantage of opportunities when they arise. With basic accounting software, you’ll be able to track key business metrics such as inventory turnover and operating margins, giving you more confidence with your cash flow, and comfort in shooting for big opportunities.
  5. Keep your business and personal finances separate. This way you will able to see how the business is operating with clarity. You can then pay yourself, and use any excess to reinvest in and grow your business.
  6. Build a cash reserve.  It’s not easy, but access to cash can make or break your business. It can provide a cushion to manage unexpected events, give you insulation from inevitable economic cycles, and let you take advantage of opportunities. It will put you in a strong position to grow and weather the occasional storm, even if it means paying yourself a little less in the short term. In the long run, it will mean more money in your pocket.
  7. Forecasting. Undertaking regular reviews of sales figures against the forecast can be valuable, especially if the results are different from what was expected. Revising the forecast will help, but the most important take-away from this experience would be to identify the reason for any shortfalls in revenue. Identify issues early and you could alleviate (or better still, avoid) potentially bigger issues.

Most importantly, be honest and objective when making decisions within and for your business. Be prepared to make changes in your processes, which may include recognising and fixing problems that are causing poor cash flow, to achieve your business objectives and forecasts.

Ultimately, your business won’t survive without positive cash flow. Managing it properly is dependent on the clarity and currency of your processes and forecasting, and understanding your key cash flow drivers. It’s the lifeblood of your business and should be treated as such.