By Andrea Bradley
How to better manage your business cash flow.
Managing your business cash flow is often a major challenge and how well it is managed is critical to the immediate financial health and long term sustainability of your business.
The task of managing cash flow is increased in complexity as the number of transactions and amounts of money involved grows. Cash flow can be very difficult to manage and many businesses experience difficulties at some point in time managing their cash position. A business in a cash crisis can have trouble accessing suppliers, paying wages and other critical overheads. This position is not only very stressful but it can also potentially disrupt operations and the ability to generate revenue.
Cash flow forecasting enables you to predict peaks and troughs in your cash balance. It uses estimated and/or actual figures and shows the expected flow of cash in and out of your business as well as predicting the bank balance at the end of each month. A forecast usually covers the next 12 months, however it can also cover a short-term period such as a week or month.
If you need help to develop a cash flow forecast for your business please contact your WDF Professional team who will be able to assist.
In the meantime here are some tips on how to improve your business’s cash flow:
1. Set your credit terms carefully
The need to extend credit to customers is a fact of life for most businesses but it is important to set clear limits. Implement a good credit management system which incorporates well defined credit policies with preventative measures to minimise the risk of credit defaults.
2. Encourage your debtors to pay quickly
It is vital to master the art of debtor management. Get your bills out quickly and chase debts promptly and firmly. Consider offering a small discount as an incentive for prompt settlement of accounts. You also need to manage the risk of missed debtor payments, ageing debts and credit default as each of these can have severe implications for your cash flow.
3. Pay your creditors strategically
Take advantage of credit terms where you can and prioritise costs according to the severity of the consequences for not paying. Wages, taxes, superannuation, loan repayments and rent are at the top of the list followed by key suppliers and then all other payments.
4. Smooth out the lumps
Use your cash flow forecasting to predict when lean cash flow periods are coming and plan accordingly. For example, it is invariably more difficult to get debtors to pay at BAS time and over Christmas, so make sure you have sufficient cash resources to pay wages and other inflexible expenses during these periods. Equally, avoid funding major purchases from your business’s working capital unless you are sure you have the cash to cover it.
5. Use finance products effectively
Overdrafts, premium funding, lease facilities and cash flow funding products can all be excellent tools to help smooth a business’s cash position. A business credit card can also be a helpful tool provided the debt can be paid off in full at the end of the month to avoid high interest charges.
6. Do not incur penalties
The Australian Taxation Office and the Australian Securities & Investments Commission both impose penalties for late lodgements and general interest charges for late payments. Paying these debts first will save you money and stress.
7. Keep your hands out of the till
Discipline yourself to make cash drawings only in line with conservative cash flow forecasts. Cash drawings are effectively just another expense for your business and should be treated accordingly.