As they say, “cash is king”. Cash flow improvement is the centre of business life.
Cash flow is the difference between inflows and outflows. Income is not counted until received and expenses are not calculated until paid. Cash flow also includes infusions from investment and financing activities. Speeding up the inflows, slowing down the outflows, and increasing the cashflow ‘buffer’ is essential for long term, sustainable growth of every business. Here are several strategies to improve cash flow:
Create a Cash Flow Forecast:
Forecasting your business cash flow is essential. It helps to minimise uncertainty by predicting peaks and troughs in your cash balance and will highlight the cycles in your business. If at any point you have a small or negative cash balance, you have a potential problem. Be conservative when preparing a forecast. Start with the amount of cash on hand. Then make a list of anticipated outflows for each month, such as wages, super, rent, marketing, stock purchases, loan repayments, tax liabilities, new equipment, etc. Then make a list of the anticipated inflows for each month, including customer payments, investment returns, and financing injections. Finally, subtract the outgoings from the incoming for each month. To even out cash flow, look at the timing of your spending, and spreading out large purchases if necessary. Then monitor your actual cash flow compared with your forecast.
Regularly reviewing your inventory will help save time and money. Determine and maintain inventory at an optimal level. Having too much stock can incur extra storage costs, potential deterioration, and can lead to cash flow deficits. While too little stock can mean lost sales and disrupted business operations. Try to implement a just-in-time inventory order system to maximise cash flow.
Reduce overhead costs:
Review your current overheads to see where you can reduce costs. Try to aim for efficient spending and cut waste. What expenses can you do without? When renewals come around, like insurances etc look for the best price, don’t just renew the policy without doing your research first. Strategies can also include tax minimisation, managing staff overtime and improving administration and compliance efficiencies. Negotiate with suppliers for upfront pricing or better deals where possible. Prepare a budget to predict and monitor spending.
Many businesses are frightened to increase prices, because they are worried it will lead to reduced sales. Your pricing should be reviewed annually. Experiment with pricing to find the perfect number. How high are customers willing to pay? You may like to do an analysis of whether your market will support an increase in price. There is no way of knowing unless you take a chance and make a change. Once the price rise has been implemented, monitor KPIs (Key Performance Indicators) so you can track the effect of the price change on your business.
Review Debtor management:
Proper management of your debtors will help you to get paid faster, prevent bad debts and maintain healthy cash flow. It also helps to maintain strong relationships with your customers. Debtor management strategies include: issuing invoices prior to services or immediately after; setting credit limits; keeping your payment terms short; conducting credit checks on customers; offering small discounts for upfront or early payments; and charging interest on late payments. Be sure to clearly list your terms on all customer agreements and invoices, and make it easy for customers to pay by ensuring you have electronic payment facilities.
Do you need help taking control of your business and manage cash flow? Why not book an obligation free consultation with us at Clear Path Accounting to discuss how we can help you. We’ll work with you to develop an action plan to improve your bottom line.
Written by: Suzanne Walker CPA