1. Regularly keep financial records up to date
Financial records are the backbone to the business and it is critical that you keep them up to date and monitor regularly so your business can be the best it can be. You should ensure that all your invoices and payments are entered weekly into your financial system and review your profit and loss statement monthly. Cash flow forecast will help you monitor the cash position of your business and this should be prepared at least monthly. However, weekly will show you each week what payments need to be made and where the money is coming from.
2. Improving your cash flow management
Before you can prepare your Cash Flow Budget, it is important to first know and have a thorough understanding of your balance sheet. Many business owners get over-enthusiastic about selling their products and services and focus only on Profit and Loss instead of looking at the entire financial situation of the business. This can prove fatal to a business as healthy profits can often mask an impending cash flow problem. Have a properly structured Balance Sheet and make sure you understand all the figures included in it. When you have a comprehensive balance sheet, you can now develop a cash flow budget.
3. Shorten your credit terms
While having a cash flow budget is a great help in planning your finances ahead of time, another key to improving cash flow is to get more money into your business. One way to do this is to shorten your credit terms. Extending credit to customers is a common practice for many businesses but make sure that the credit terms you are giving is not impeding cash flow. Research on the usual credit terms for your industry and assess how you can shorten this without harming your relationship with clients. If your usual terms are 60 days and you shorten it to 30 days, some clients may not respond favourably. To encourage these businesses to pay earlier, perhaps you can offer early payment discounts or value added services for early payment.
4. Manage your debtors
Make sure you inform your customers how much time they have before their accounts become due for payment. You can send them payment notices or give them a call when payment deadlines draw near. You can also delegate a staff member to be in charge of invoicing, collections and follow-up. This can help speed up your invoicing and collection process. The delegated staff member can also follow-up with customers whose credit terms have lapsed but still have not settled their payments.
5. Prioritise payments
If your supplier gives you a credit term of 60 days, then use it. Do not feel rushed to pay it earlier than 60 days. Take advantage of credit terms being extended to you whenever you can. Prioritise payments according to the severity of consequences if you fail to make payment. Prioritise wages, suppliers and ATO payments.
6. Avoid incurring penalties and interests
Make sure to settle your payments on time with creditors as some of them, like the ATO and ASIC, will impose penalties for late payment. Whenever you can, try to pay your business credit card bill in full in order to avoid interest. Penalties and interests can amount to a considerable amount of money which you could have used to pay other liabilities.
7. Top tips to help increase cash flow include:
- Prepare weekly cash flow forecasts to understand what has to be paid and when
- Sell old or excess stock
- Have solid procedures in place for collecting outstanding debts from customers – and stick to them!
- Talk to your bank about putting a temporary loan in place, such as an overdraft
- If your profit is reducing then your business could be on a slow downward spiral. You need to monitor profit and identify issues regularly
- Gross and Net margins – Check your stock prices and on costs and review expenses regularly to ensure that you are passing on any increases to your customers if possible
- Have measures in place to retain and attract new customers and are they working?
- Review the productivity of your staff and your rosters. If you have staff that are sitting idle then this will impact profit. Make sure all staff are fully employed during their rosters
- If you don’t have access to finance when you need it, this could be the start of the end. Having a finance facility in place that is available when things get tight is a favourable contingency plan. So you should look at. Obtaining a finance facility when the business is showing good profit and cash flow
- Develop a good relationship with your bank and keep them informed on how the business is going, so that if you need to approach them for finance they will be well informed on your business operations which may assist in obtaining finance
- Have a recruitment plan in place that outlines the attributes that your staff need to meet, such as any qualifications, flexible to working hours, team player etc. and spend extra time at this point to ensure that you employ the right staff
- Be an employer of choice – provide great support and training to your staff and the word will get around. involve staff in managing the business – you will get more commitment when your staff have had a say. ensure that the culture within the business provides the rewards staff are looking for.
Cash is the lifeblood of business and without it your business can fail despite high turnover or profitability. As such, it is crucial to effectively manage your Cash Flow. Having a Cash Flow budget can help you plan your finances to ensure your business can meet day-to- day expenses.
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