Why Managing Business Cash Flow is so ImportantFebruary 27th, 2019
Cash flow has been described as the lifeblood of a business, and good cash flow management is critical for business survival and sustainability.
But why is cash flow so vital for organisations? We explore the answers here and look at some ways you can manage your cash flow.
What is business cash flow and why is it important?
Your business cash flow is the money coming in from revenue and going out for expenses. Without smart cash flow management, cash flow can become an issue even for profitable businesses. If you fail to pay your suppliers and lenders, suppliers might refuse to deliver essential inputs and the banks could foreclose on you. Poor cash flow isone of the biggest factors in small business failure, whilst healthy cash flow can support growth by allowing you to invest in new locations, research, and staff training.
Good cash flow management ensures you’ll always have money available for paying expenses when they’re due. Positive cash flow – when you take in more cash than you send out –is optimal for businesses because it means you can keep investing back in your business whilst meeting your debt obligations. If more cash is going out than coming in, you’re at risk of overdrawing and you’ll need money to cover your overdraft. For this reason, new businesses often need working capital, such as a loan, to keep operating and scale up.
Cash flow depends on a long list of factors – your customer payment terms, supplier payment terms, loan payments, spending decisions, and more – which is why having a strategy for managing it is vital.
How to manage your business cash flow
Getting serious about cash flow management could help you avoid poor cash flow, which is one of the biggest stumbling blocks for businesses.
1. Track, monitor, and plan
Use a cash flow statement to monitor and plan your cash flow. Forecast inflows against outflows so you can address cash shortfalls or surpluses if they occur. For example, you could put excess cash into short-term investments to boost income, or you could arrange for loans to cover shortfalls in cash.
Developboth short-term and long-term cash flow projections so you can formulate an informed capital strategy for meeting business needs. Short-term projections are weekly and monthly, whilst long-term projections might give you an annual or three-to-five year outlook.
Check your inflow, outflow, net cash flow, and opening and closing balance figures on a regular basis. Review actual inflows against forecast figures to see if your cash flow is as planned.
2. Review invoicing and payment processes
Send invoices out for payment quickly. Delaying invoicing can extend your payment cycle andaffect your cash flow outcomes. Depending on your sector, it could be reasonable to ask for deposits upfront or payments at intervals. Follow up on your invoices regularly and chase up late payments. Offer discounts for early payments, andexplore different banking products to encourage customers pay as soon as possible.
3. Build a cash reserve
Build an emergency cash reserve to serve as a buffer against negative cash flow periods. This is particularly important if your industry is subject toseasonality of sales. With a healthy cash reserve, your business will be able to weather unexpected events and stay insulated against seasonal trends. You’ll also be in a better position to take advantage of business opportunities, such as discounted inventory or sudden large orders.Check your cash flow history to work out how much you should keep in cash reserves.
4. Manage payments with suppliers
Use your payment terms to the fullest. For example, if your supplier allows 30 days, build up your cash flow by using the full payment term. Take advantage of discounts for paying early if you can. Build strong supplier relationships so you can negotiate with suppliers for longer payment terms where possible.
5. Stock control
Avoid holding too much stock as this ties up cash while increasing your storage and insurance expenses. Explore good stock control strategies so your business is only keeping as much stock as it needs for efficient operation.
6. Trim overheads
Keep your overheads under control, and go green to lower your electricity and water bills. Set these out clearly as company policyto encourage your staff to comply.
7. Keep accurate, up-to-date records
Your projections and cash flow strategywill be only as good as your records. Keep your accounting records up-to-date and accurate so you can check, review, and track at a glance.
8. Incorporate cash flow into decision-making
Make cash flow part of your decision-making. You can do this by considering any impact on your cash flow as you weigh up different decisions. For example, increasing your marketing budget could boost sales, but will it mean you need plan for a cash shortfall for a certain period of time?
Take control of your cash flow
Cash flow is integral to your business and its operations. Without careful planning, you could end up with negative cash flow, exposing your business to supplier and bank demands. Tracking and planning with projections should be part of your cash flow management strategy, and smart invoicing and doing cash flow research could also help. By applying a range of cash flow strategies, you can balance growth with healthy cash flow.
Australian Debt Solvers are industry leaders in financial advisory for those with financial problems. If you’re looking for expert advice on cash flow management for your company, we can assist. Call us now on 1300 789 499.
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