What is cash flow?
Cash flow refers to the movement of money in your business, flowing in from revenue streams such as sales and flowing out through payments for expenses and asset purchases. Understanding and learning to manage your business cash flow effectively can contribute not only to business survival but can also allow you to optimise and generate more profit.
Why is cash flow important?
While the concept of cash flow may sound simple, keeping your cash flow healthy is vital to the running of a successful business. One of the biggest causes of new businesses failing is poor cash flow management especially when expenses and capital outlay are high but sales have not yet reached the point of covering costs. A positive cash flow means a business has cash left over after paying their expenses and purchases as they fall due. A positive cash flow enables a business to be in a position to reinvest, pay off debt or to build up a buffer of reserves for the future. A negative cash flow means that a business is paying out more than what is coming in, which will lead to the reliance on reserves or alternative sources of money to keep the business afloat.
What can I do to improve my cash flow?
- Create a Cash Flow Forecast: The first step to improving your cash flow is to plan out your future expected revenue against your expected costs. A Cash Flow Forecast will help you to plan out if you have the funds available to purchase more or to invest in revenue generating assets. Our Business Advisory team can help to put together a forecast for you to enable you to make better informed decisions.
- Send out invoices immediately: If you send out an invoice immediately after a job is completed or when goods are delivered it will cut down the time until you receive payment from customers. It is important to time the receipt of receivables with the payments of suppliers. If your customers aren’t paying in time before you need to pay your suppliers, you create a cash flow problem which may lead to not being able to pay suppliers who are key to running your business.
- Inventory management: Do a rundown of inventory, see what goods are moving fast and what’s not working. Inventory sitting around slows down your cash flow. Consider buying less of what doesn’t sell fast.
- Offer discounts for early payments: Making sure you receive payments from customers promptly is vital to maintaining a healthy cash flow. It may be a good idea to offer early payment discounts as an incentive for customers to make early payments. While it may affect your profits slightly, the pay-off of getting that cash earlier will allow you to make your payables with less stress.
- Late payment penalties: A late payment penalty on your invoices can also encourage customers to pay on time. Make sure you specify how much the penalty will be and when they have to pay it.
Our team at Giles & Liew are experts in helping small and medium sized business owners to keep their businesses running smoothly and successfully. Contact a member of our Business Advisory team to help to identify some of the pain points within your business that could be triggering cash flow issues and for advice about how to make improvements.