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Cashflow Control – Making Sure You Don’t Run Out of Money

Cashflow is king

Cashflow is king when it comes to running a small business.

In business, you can make any number of profits (or losses) for tax purposes – but you can only run out of money once. As the name suggests, cashflow management is all about managing the movement of dollars in and out of your bank account, by understanding how a business works, having access to adequate working capitalm, and adopting a planned and proactive approach.

Running out of cash is stressful, embarrassing, and not good for your wellbeing. Then there are the additional costs and finance charges that generally follow. The following tips will help you come to grip with your cashflow needs and work with your accountant and finance team to put the right cashflow strategies in place.

Cashflow is king.

Cashflow is king.

1. The first step in understanding and accepting the amount of working capital your
business needs to operate.

How much inventory do you hold? How far behind in invoicing are you, or how much cash is tied up in work in progress? What do your customers owe you? How long does it take from paying your suppliers for the materials to extracting cash from your customers? All these will soak up your cash like rain in a desert.

2. Next, ensure your business has enough cash to fund your working capital needs.

The Rule of Thumb is often keeping three months worth of outgoings in the bank for a rainy day. If you find it difficult to accumulate this cash in the business, then make sure you have a buffer of some sort, either personal funds available or an overdraft or revolving credit facility. Or maybe cut your drawings, as retained profits are by far the best and cheapest source of working capital.

3. Plan ahead.

No good finding out in your quiet season that you cannot survive until things pick up AFTER you’ve already reviewed and agreed your borrowing facilities with your bankers at your annual review some months ago. Prepare BOTH budgets and cashflow forecasts for the coming year. If you find it difficult to predict your sales, complete all the outgoings first, and then see what sales you need to cover your outgoings. At least then you have a target.

4. Monitor month by month.

Know what your monthly spend is and review your actual cashflows every month against the budget and cashflow forecasts. This provides you with early warning signs for upcoming shortfalls, when payment arrangements might need to be arranged with, for example, the ATO. Problem sorted, and no last minute panic and stress!

5. Review critical cashflow systems.

Do you forget to invoice customers? Do you invoice as you go or just at the month end? How quickly do you collect your accounts receivables? Many do not even know how much is owed to them by their customers or how much they owe to suppliers. Do you capture all time, costs or disbursements to invoice? When was the last time you checked suppliers costs to ensure you haven’t been overcharged or been billed for items you haven’t received?

6. Speed up your cash conversion cycle.

This measures the time span between a business disbursing and collecting cash. 180 days or more is very common, especially in manufacturing or businesses with inventory. Ask for a deposit, put customers on retainers or get them to pay monthly. Cut your inventory levels, maybe by arranging for your suppliers to deliver the same or next day, or negotiate longer payment terms. Many businesses who focus on this get the cycle way below the 180 days cycle.

7. Make it as easy as possible for customers to pay you.

Always quote your bank account number on your invoices, and ask for direct credits or automated payments. Accept EFTPOS and credit cards, and set up a PayPal account on your website. Why wait for a cheque to be posted in this day and age?

8. Always be on the lookout for ways to cut costs or improve revenue.

If something or someone does not save money or produce income, question its value. Review your suppliers, phase out products or service lines that do not fully contribute, fire your ten worst customers and bite the bullet with difficult or unproductive team members.

To discuss how to implement strategies to improve your business cashflow, contact Affinitas Accounting on 07 3359 5244 or email . Alternatively, you can reach us on Messenger below.

Message Affinitas on Messenger todaySource: Roberts, Nick. 8 Tips for managing your cash flow. MYOB, 4 Oct 2012.

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