Cash flow management can be defined as monitoring, analysing and adjusting the cash flow of a business to ensure that there is sufficient cash to settle payments when they become due.
It may sound simple but for many business owners, keeping track of costs and profits can be very exhausting. For a business in trouble or experiencing financial distress, cash flow management can even seem like an impossible task.
Cash flow management is vital to the growth of any business. If your business is experiencing difficult times, effective cash flow management becomes especially important if your business is to survive. Cash is king. It is a crucial requirement if you want to save our business. In this article, discuss how you can take control of cash flow, including the timing of cash inflow and outflow, and how you can improve cash flow management in your business.
Have a cash flow budget
Before you can prepare your cash flow budget, it is important to first know and have a thorough understanding of your balance sheet. Many business owners get over-enthusiastic about selling their products and services and focus only on profit and loss instead of looking at the entire financial situation of the business. This can prove fatal to a business as healthy profits can often mask an impending cash flow problem. Have a properly structured balance sheet and make sure you understand all the figures included in it.
When you have a comprehensive balance sheet, you can now develop a cash flow budget or a cash flow projection. A cash flow budget is a prediction of the expected inflows and outflows of cash in a business over a period of time, usually 12 months. It can show what funds are available to pay business expenses and can also predict the bank balance of your business at the end of each month. Having a cash flow budget enables you to anticipate the months in which finances will be tight so you can plan ahead for these months. It also enables you to foresee the months in which there will be extra cash so you can consider in advance how to best use the short term cash surplus.
You can work with your accountant to manually prepare a cash flow budget. You can also prepare it using Microsoft Excel or custom cash flow budgeting software. However, if you are unsure how to start preparing your cash flow budget, it would be best to consult with a business turnaround specialist as they have knowledge and experience in cash flow forecasting.
Shorten your credit terms
While having a cash flow budget is a great help in planning your finances ahead of time, another key to improving cash flow is to get more money into your business. One way to do this is to shorten your credit terms. Extending credit to customers is a common practice for many businesses but make sure that the credit terms you are giving is not impeding cash flow.
Research on the usual credit terms for your industry and assess how you can shorten this without harming your relationship with clients. If your usual terms are 60 days and you shorten it to 30 days, some clients may not respond favourably. To encourage these businesses to pay earlier, perhaps you can offer early payment discounts or value added services for early payment.
Manage your debtors
Make sure you inform your customers how much time they have before their accounts become due for payment. You can send them payment notices or give them a call when payment deadlines draw near. You can also delegate a staff member to be in charge of invoicing, collections and follow-up. This can help speed up your invoicing and collection process. The delegated staff member can also follow-up with customers whose credit terms have lapsed but still have not settled their payments.
If your supplier gives you a credit term of 60 days, then use it. Do not feel rushed to pay it earlier than 60 days. Take advantage of credit terms being extended to you whenever you can. Prioritise payments according to the severity of consequences if you fail to make payment. Prioritise wages, suppliers and ATO payments.
Avoid incurring penalties and interests
Make sure to settle your payments on time with creditors as some of them, like the ATO and ASIC, will impose penalties for late payment. Whenever you can, try to pay your business credit card bill in full in order to avoid interest. Penalties and interests can amount to a considerable amount of money which you could have used to pay other liabilities.
Some final words
Cash is the lifeblood of business and without it your business can fail despite high turnover or profitability. As such, it is crucial to effectively manage your cash flow. Having a cash flow budget can help you plan your finances to ensure your business can meet day-to-day expenses. You can also consider implementing new strategies to get more cash into your business at a shorter amount of time, such as implementing “pay on invoice only” instead of sending out monthly statements or implementing progress claims for credit sales.
If you need further assistance in managing the cash flow of your business, consult with a professional turnaround specialist as they can provide you advice and solutions on cash flow management. They can also help you in keeping your financial records up-to-date which is crucial in cash flow planning and management.