Small Business: Are You Managing Your Cash Flows Effectively?
Is your business doing well or are you struggling with your finances? In any case, effective cash flow management is essential – after all, it is your ticket to increasing revenues and business growth. But how do you start and from where? Here are some expert tips.
Understand working capital
Do you truly understand your working capital? Working capital is your current assets minus your current liabilities and includes cash, inventory, accounts receivable and payable, payroll, loans/credit and unpaid taxes.
Now, have you decided the amount that you consider to be required? Before you do anything else, make sure that you have the answers to following questions:
- What should be your minimum inventory level?
- When do you invoice customers, how regularly and how long does it take for them to pay you?
- How much do your customers owe you? Or do you owe them any products or services for advanced payments made?
- How long does order preparation or service delivery take place, right from when you pay your suppliers to getting payments from your clients?
Have enough cash on hand
The next step is to ascertain that you have cash on hand to meet your basic expenses. Do you have some kind of buffer in the form of a term deposit, an overdraft, revolving credit facility or even personal funds? Having enough cash to cover 6 months operating expenses is a good buffer to call upon when unexpected times come and you need access to additional cash. Remember, when you do this you’ll need to identify where you could generate extra sales easily and look to delay non-discretionary expenditure.
Plan for the future
At least for this year anyway. Predict your incoming and outgoing cash flows for the next few months. Ascertain that you have or would have enough funds through this time to keep your business running. If you can’t forecast sales, then plan your outgoing cash flows first. Now figure out the amount of income that you need for your outgoings. That’s the target that you should have in mind. Next year you will have more data and experience so you should be able to plan for a longer time frame.
And then plan for the month
Great, you have a yearly plan. Now let’s work on a month by month plan. Do you have enough cash to meet all your expenses by the 20th of this month? Create a plan for every month from now onward, and if you’ll ever have to face a shortage, you’ll know sooner rather than later and make the necessary adjustments before issues arise that negatively affect your business. Excel is great for this or you could use the function available in many of the cloud based accounting systems.
Review your existing systems
Analyse your existing finance and other administrative systems which are not great for many of the small businesses that we have come across. When do you invoice and do you do this regularly? How soon do you get your receivables? How do you collect – direct debit or monthly account and is follow-up automated? What reports do you use to know what you owe to suppliers and what your customers owe to you?
Ensure your customers can pay you easily
How many payment options do you accept? Allow customers to pay you through any means that they find convenient. Accept credit cards, PayPal, EFTPOS and see if payments can be automated. Fees you incur having these are small compared to time spent chasing up outstanding amounts.
Bring in an expert from outside
The best tip that we can give you is to use professional accounting, advisory and bookkeeping services, experts who will reduce unnecessary expenses, save you time, automate your systems and optimise your finances.
