For any business, survival depends on continued positive cashflow. In difficult economic times the sooner the cash is in the door the better. Here are seven (7) tips for managing cashflow:
1. Build a Cash Flow plan.
By doing so, you will know when your peak demands for cash will be thereby allowing you to manage more effectively. If you can demonstrate to your bank that you understand your business and its flows the greater the confidence they will have in your ability to repay any financing they may provide. Your accountant can do this and the investment will more than pay for itself.
2. Understand Variable Costs vs. Fixed Costs.
Too many businesses do not really understand this. It is important as a business can defer or eliminate variable costs without financial penalty. For example Rent despite generally being paid monthly is a fixed cost. Whilst marketing is a variable costs. Sometimes you have a choice of paying on a monthly basis or on an annual basis which may provide a discount. By referring to your cash flow plan you can determine if it is better to pay up front and receive the discount or pay on a monthly basis which would allow you to turn the tap off when you like.
3. Use Suppliers terms.
If you don’t have to pay a bill to the 30th of the month then don’t. However do pay it promptly when due. Just remember you are a supplier to your customers and you would not appreciate them not paying so give your suppliers the same courtesy.
4. Don’t become your customer’s banker.
Similarly resist the temptation to have your customers dictate payment terms. There is a growing trend amongst multi-nationals to extend their payment terms out to 90 days. You must determine is the business worth it. Can you afford to provide credit for 90 days – most small businesses can’t but your Cash Flow plan will tell you. So when you get a new client be upfront about your payment terms.
5. Chase debts early.
While most of us hate ringing up to chase an unpaid invoice, the sooner you make contact with your customer after the bill has passed its due date the more likely that it will not turn into a bad debt.
6. Manage Inventory levels.
If your business has inventory then it is extremely important that you manage the levels. Don’t buy bulk quantities to obtain a discount if it will be difficult to off-load. This is especially important for business where currency of stock is important (e.g.: food outlets, fashion retailers, etc.)
7. Plan and manage your tax obligations
We also recommend to clients that to ensure there is sufficient cash to meet Tax, GST and PAYG liabilities which are often incurred well before there due and payable that they open a high interest online bank account and transfer the cash to it when they calculate their liability. So if you have a weekly payroll then transfer the PAYG tax each week, net GST receipts each month and a third of your quarterly tax instalments each month will ensure that you have the cash to meet your obligation and don’t fall foul of the tax office. Finally, we cannot emphasise the importance of cash flow management as it will enable your business to survive in tough times and grow profitably. Your Accountant has the professional skills to assist in this management.