cashflow management

7 rules to manage small business cashflow

Every small business whether it’s a start-up or an established business, must follow certain rules to ensure its sustainability and longevity. One of these rules – and the most important one – is managing cashflow. You’ll sleep easier at night knowing you’ve got a good handle on this in your business.

Business owners can run into problems with cashflow even if they’ve achieved their profit targets. Your business may have made a great profit for the month or the quarter, but if expenses are due before the profits reach your bank accounts, there may not be enough money to run the business.

The way to avoid cashflow problems is to have full visibility of the business’s cashflow position. This means knowing how much money is coming into the business and how much money is going out, with clear visibility of your cashflow position to plan ahead for the natural ebbs and flows of growing a business. This may come across as pointing out the obvious, but over many years of providing advice and support to small businesses we’ve seen businesses lose track of cashflow because they get too busy immersed in the day-to-day events of running a business.

Here are 7 ways to improve the cashflow in your small business:

1. Keep bookkeeping and reports up to date

Transparency and visibility to your cashflow position is essential to having control over the cash in your business. By utilising cloud-based accounting software, such as Xero, you can maintain up-to-date accounting records. In-built features can help you to speed up the payment process and reduce the likelihood of errors with tools such as repeating invoices and digital and mobile payment options. We recommend committing to weekly and monthly meetings to review your cash position, trade debtors and creditors.

2. Build your business’s cash reserves

A business with access to cash reserves is a business that has a much higher chance of surviving turbulent times, interest rate increases and economic cycles.

In Australia, around 82% of businesses fail in the first five years because they don’t have enough cash reserves or good cashflow when they hit a bump in the road. There are ways to minimise this risk in your business. You may need to pay yourself less or cut back in some of your expenses for a while as you build your cash reserves. But you’ll be more at ease that you’re providing a safety net for your business, and you’ll sleep better at night.

3. Tighten up your invoicing

The quicker you get paid by your customers, the more available cash you will have in the business. Take some time to review your invoicing methods and find ways to improve your invoicing process. Here are some questions to think about:

  • Can you send invoices sooner?
  • Do your invoices offer clear payment options?
  • Are your invoices going to the right people?
  • Do you offer digital payments?
  • Can you use payment services that provides direct debit facilities? This is especially useful if you offer a monthly service.
  • Could you offer clients an incentive if they pay before the due date?

4. Manage Inventory

Keep your inventory levels in check. Holding excessive inventory ties up cash that could be used elsewhere. Utilising quality accounting software can assist in this process.

5. Lease your equipment instead of purchasing

Leasing equipment instead of buying it up front means you don’t have a lump sum invested in assets. Whether to lease or buy is a decision for each business individually, but it releases your cash reserves and adds more money to your savings account.

By leasing, you’re able to upgrade to new technology more easily, and this may help you offer more services to your clients and grow the business. Leasing payments plans are flexible so that you can choose repayment options, which ease the outgoings of the business further.

6. Keep business and personal finances separate

Having separate accounts for your personal and business needs will make it easier to track your income and expenses. It’s easy to confuse the two and lose visibility of personal versus business spending, which also has a flow on effect on your tax position.

7. Get help with cashflow forecasting

Cashflow forecasting measures the cash that flows in and out of your business. Cash flowing into the business is mainly from sales, but also from other sources such as grants or rebates. Cash flowing out of the business includes salaries and wages, bills and invoices, supplier payments, maintenance and general bills.

By taking a systematic approach to predicting your cashflow, you will be better able to plan ahead and set aside cash for certain parts of the year, therefore mitigating risk to the business.

SMALL BUSINESS ADVISORY AND CASHFLOW FORECASTING

If you need some help with managing the cashflow in your small business, building up your cash position or if you want to put a plan in place to minimise cashflow disruptions in the future, please give us a call. Our experienced team at Port Phillip Group has helped many small businesses stay buoyant through turbulent waters by putting some simple cashflow strategies into place.

Please call us on  (03) 8790 7700 or email us at reception@portphillipgroup.com.au for a free 30-minute consultation about your business (for new clients).

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Level 1, 73 Canadian Bay Rd
Mount Eliza
VIC 3930
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Mount Eliza
VIC 3930

Let's

Get in

Touch

Office

Level 1, 73 Canadian Bay Rd
Mount Eliza
VIC 3930
View on map

Mailing

P.O Box 121
Mount Eliza
VIC 3930