8 simple tips to take charge of your cash flow
When times are changing, keeping the cash flowing through your business is more important than ever. Here’s how to master the art of cash flow management.
Cash flow is critical for business. In fact, Australia’s Small Business and Family Enterprise Ombudsman has cited poor cash flow as the reason 90 per cent of small businesses fail.
When times are good, poor cash management may not matter as much – with enough money consistently flowing in to cover the bills, it can feel like there’s nothing to worry about. But when times are harder, that’s when it can be challenging, and when solid pre-planning can come into its own.
With that in mind, here are eight pivotal steps you can take to improve your business’ cash flow.
1.Use the right merchant facilities
How your customers pay you can be one of the greatest contributors to cash flow success – by making a significant difference to your working capital cycle.
“Leveraging different merchant facilities can make a big difference to your business and cash flow,” says Casey Annetts, NAB Regional Manager – Small Business Metro SA, Business & Private Banking.
You can save on costs by processing tap and go transactions through the EFTPOS network, she says, or via NAB Easy Tap. And you can keep cash flowing with same-day settlement, or recoup payment costs by introducing surcharge fees where appropriate. Investigate what’s available and seek expert advice on what’s right for your business.
2. Understand your working capital cycle
Monitor your exact outgoings and income over a 12-month period. Consider your day-to-day operations, but also one-off projections for expenses like new equipment, staff hiring and development costs, and tax obligations, then see what you can adjust.
“Go back to basics and look at areas where you can reduce costs in your business,” says Casey. “Planning is a big part of it – forward plan your cash flow and you’ll really understand your expenses and working capital cycle.”
3. Negotiate payment terms
When you pay others and how you get paid are two significant levers you can pull to improve your cash flow. It makes sense to arrange payment terms so you don’t have to pay suppliers until after your customers pay you.
Start the conversation with each of your suppliers and be upfront and reasonable when you ask for better terms.
4. Build a buffer
A cash reserve can shelter your business from unexpected situations. Even if you can only build this buffer up slowly, says NAB Small Business Banker Regional & Agri Andy James, do make it a priority.
“Businesses with a cash buffer will get through economic shocks, like what’s happening at the moment,” Andy says. “Businesses without one, or without access to capital, will suffer as the shocks come, and especially as interest rates continue to go up.”
This buffer could involve a commitment to putting a small percentage of your takings into a separate account such as NAB’s Business Cash Maximiser.
“Aim to put away at least 10 per cent of your takings – on top of the money you’re already putting aside for GST,” Andy says. “That will really help you build up a buffer to cover at least three months of operating costs.”
While you grow this reserve, look at other options to help you manage your cash flow. You might use the interest-free period on a credit card or arrange for an overdraft – talk to your banker to explore your options.
5. Keep on top of tax
A scenario Andy has seen many times is a profitable business coming unstuck at tax time. And it’s usually because the business has used money it should have set aside for tax to prop up its cash flow.
It’s an easy trap to fall into: other suppliers and fixed costs need paying now, whereas the tax bill isn’t due for months. Then the tax bill comes around and there’s no money set aside to pay it.
Many businesses will then enter into a payment plan with the ATO, without understanding that there are steep interest rates attached (currently 10.46 per cent). Instead, he recommends putting your tax component into the same account as your cash buffer as soon as you receive money.
“It removes the money from your everyday business account, so you’re not tempted to churn and burn it in your monthly cash flow,” he says.
6. Know your stock turnover
Another area where cash flow comes unstuck is stock levels – keeping more stock on hand than you need ties up your cash unnecessarily.
Instead, know your inventory turnover rate, set minimum threshold stock levels and update your forecasts regularly. If you haven’t already, invest in a quality inventory management system to help with this.
7. Talk sooner rather than later
It may sound obvious, but if you’re struggling with cash flow, don’t try to push through until your otherwise profitable business is sliding into the red.
“What we often find is that customers come to us at the final hour,” says Casey. “I think that’s due to fear of what the consequences might be, but that idea needs to change. Reach out before then. Our bankers are on hand at all times to support, discuss and suggest solutions – we’re here to help.”
8. Have a trusted adviser
“Most business owners are not accountants,” says Andy. “They haven’t yet mastered the art of cash flow management.”
If that’s the case, it’s critical to work closely with someone who has. Your banker, accountant or business coach can help you set up a system to closely track your working capital cycle.
“Don’t underestimate the power of having a local, personable relationship with your banker,” says Casey. “The more they know your business, the more they can help you plan and strategise.”