Healthy cash flow is the lifeblood of any thriving business. Over our 20 years in small business accounting, we’ve seen countless enterprises rise and fall based on their ability to manage this crucial aspect of finance. It’s not merely about having money in the bank—it’s about mastering the rhythms of your financial inflows and outflows to keep your business robust and ready for growth.
Today, we share some strategies for navigating cash flow management. Whether at the helm of a fledgling startup or steering an established enterprise towards new horizons, these insights will help you chart a course for financial stability and growth.
The Cashflow Conundrum
Before we discuss practical tips, let’s explore why cashflow management can be so challenging, especially for growing businesses.
Growth Can Be a Double-Edged Sword
Here’s a paradox that catches many business owners off guard: rapid growth can strain your cash flow. As your business expands, you’ll likely need to invest in new equipment, add additional staff, or boost your inventory. These all demand upfront cash, often before you see a penny of return from your expansion efforts.
The Timing Tightrope
Another common pitfall is the mismatch between when you need to pay your suppliers and when your customers pay you. This gap can create a cashflow squeeze, leaving you short even if your books show a healthy profit.
Now that we’ve laid out these challenges, let’s roll up our sleeves and develop practical strategies to keep your cash flow robust.
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Make Cashflow Forecasting Your New Hobby
Okay, maybe “hobby” is a stretch, but regular cashflow forecasting is absolutely crucial. Think of it as your financial crystal ball – it helps you spot potential shortfalls on the horizon and plan your moves accordingly.
Forecasting That Works
- Start with what’s in your account right now
- List out the money you expect to come in (customer payments, loans, etc.)
- Tally up the cash you’ll need to shell out (supplier payments, wages, rent, etc.)
- Crunch the numbers to project your cash position for each week or month
Pro tip: Embrace technology. Many of our clients swear by tools like Xero or QuickBooks to streamline their forecasting process.
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Whip Your Invoicing into Shape
Nothing throws a spanner in the works, quite like late payments from customers. Here’s how to grease the wheels and get paid faster:
Speed and Accuracy Win the Race
Fire off those invoices the moment you’ve delivered your goods or services. Double-check every detail to prevent any hold-ups.
Give Your Customers Options
The easier it is for customers to pay, the quicker you’ll receive cash. Accept credit cards and bank transfers and consider modern options like PayPal or Stripe.
Dangle a Carrot
A small discount (think 2%) for settling within 10 days can motivate prompt payment.
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Keep a Tight Rein on Your Inventory
Your inventory can be a real cashflow hog for businesses dealing in physical products if you’re not careful. Here’s how to keep it in check:
Embrace the ‘Just Enough’ Approach
Think ‘just-in-time’ inventory. It’s about having what you need when you need it – no more, no less. This approach keeps your cash from being tied up in stock, gathering dust on your shelves.
Give Your Stock a Regular Health Check
Make it a habit to review your inventory levels. Those slow-moving items? They’re cash in disguise. Consider running a sale to convert them back into spendable money.
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Turn Suppliers into Allies
Your suppliers aren’t just vendors – they’re potential partners in your cashflow strategy. Don’t be shy about negotiating better terms:
Push for Breathing Room
If you’ve built a track record as a reliable customer, your suppliers might be open to extending your payment terms. Stretching from 30 to 60 or even 90 days can significantly boost your cash flow.
Think Big to Save Big
Got the storage space? Buying in bulk often comes with juicy discounts. It might seem counterintuitive when discussing preserving cash, but sometimes, you must spend money to save money.
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Build Your Financial Fortress
Every business needs a rainy-day fund. It’s not just about weathering storms – it’s about being ready to pounce on opportunities, too.
How Big Should Your Cushion Be?
Aim to squirrel away enough to cover 3-6 months of operating expenses. It might seem like a tall order, but trust us, you’ll sleep better knowing it’s there.
Make Your Reserve Pull Its Weight
Don’t let that cash sit idle. Park it in a high-yield business savings account. You want it readily available, but there’s no harm in earning a bit of interest while it waits.
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Leverage Tech to Your Advantage
We’re living in a golden age of financial technology. Use it to your advantage:
Your New Best Friend Accounting Software
Invest in robust accounting software to track expenses, fire off invoices, and generate cash flow reports at the click of a button.
Automate Those Awkward Conversations
Late payment reminders can be painful, but they’re crucial. Use automated systems to chase those overdue invoices. It saves you time and spares you the discomfort of pestering clients.
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Know Your Financing Options
Even with the best planning, there might be times when you need a cash injection. Here are some avenues to explore:
Invoice Financing Not Just for Big Players
This used to be the domain of large corporations, but now it’s accessible to smaller businesses as well. It lets you borrow against outstanding invoices, bridging the gap between delivery and payment.
The Business Line of Credit
Unlike a traditional loan, a line of credit lets you dip in and out as needed. It’s perfect for managing those short-term cashflow hiccups.
Peer-to-Peer Lending
Online platforms connecting businesses with investors sometimes offer better rates than traditional banks. It’s worth a look if you’re after something different.
Word of caution: Always read the fine print. Ensure you understand the terms and can comfortably meet the repayments before diving in.
Mastering cash flow isn’t a one-and-done deal – it’s an ongoing process that evolves with your business. The strategies we’ve covered here have helped countless businesses not just survive but thrive.
Good cash flow management is designed to do more than keep the lights on. It’s about building a robust financial foundation to support your business as it grows and changes.
If you’re feeling overwhelmed, don’t go it alone. A good small business accountant , like the team at VBA can be worth their weight in gold, to help you implement these strategies and tailor them to your unique situation.
At VBA we specialise in strategic tax advice, offering tax and financial reporting for individual income earners, family businesses, tradies and construction companies.
Victor Bimrose Accountancy Pty Ltd (ASIC No. 1259423) ABN 53 010 957 294 is a Corporate Authorised Representative of Merit Wealth Pty Ltd ABN 89 125 557 002, Australian Financial Services Licence Number 409361.
General Advice Warning: This information has been prepared without taking into account your objectives, financial situation or needs. Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.
