Maximising cash flow

Cashflow: The lifeblood of your business

Economic downturns are cyclical, and peaks and troughs are a natural part of any business’ life cycle. But it today's climate, the business community is facing tough times ahead. 

Here, we outline ways your business can maximise cash flow, and prepare for economic ups and downs. 

Seasonal cash flow management

Seasonally monitoring your overall financial condition and making informed financial decisions is key to ensuring your business remains financially viable. To weather a major downturn, you need to be well prepared and have a flexible balance sheet, enabling you to act quickly and make the right decisions. 

But this practice doesn’t only apply to major economic downturns. Any number of issues within your business – the monthly wages bill is due, anticipated stock hasn’t arrived to fill customers’ orders, a critical piece of machinery has broken down requiring replacement, your biggest debtor is taking their time to pay, etc. – can leave you without enough cash in the bank to pay upcoming bills. 

You can run into seasonal cash flow problems even if you’ve had good sales and are operating profitably. These situations may only be a temporary cost hump, but good cash flow management ensures your business always has enough cash to meet expenses when they need to be paid, even when they are unexpected. It will also help you budget for anticipated interest rate rises, project how much in borrowings your business will need and how much debt you can afford.

Forewarned is forearmed when it comes to cash flow

It’s critical to keep a vigilant eye on revenue, cost structure, your business plan and capital structure to ensure your business remains cash flow positive at all times. When times are tough you may find it necessary to extend your payment terms, so cash is going to get tight. If you hold more of your assets in cash, you’ll have a better chance of surviving a downturn.

Having adequate working capital at all times is really important and managing this capital carefully is just as critical whether you’re experiencing a downturn or growth. In fact, rapid growth can just as likely result in a cash crunch. If you envisage a strong growth spurt in the near future, it's wise to talk to your bank about an overdraft earlier, rather than later.

As your business grows, you’re probably busy chasing sales and new clients – and it‘s easy for stock to run down and your debtors not to be chased. Strong sales this month can often mean a cash shortage next month. That’s why it’s imperative to understand the consequences of growth and carefully monitor your business cash status

Your cash flow forecast should represent a ‘best guess’ of cash inflows and outflows over a period of time. If you’re aware of issues early, you have time to adapt.

Your forecast can also help avoid growth pains by highlighting the need for increased capital expenditure and the imbalance to cash flow that comes from an increased debtor book.

Your cash flow forecast also helps build your credit track record, which is useful information when asking banks for credit.

Strong sales this month can often mean a cash shortage next month. That’s why it’s imperative to understand the consequences of growth and carefully monitor your business cash status.

Cash flow and debt management

Profit is important in the long run, but your business may not be around in a year’s time if you don’t manage your cash flow appropriately now.

Managing your debtors efficiently and cash flow effectively, along with having disciplined processes and systems in place, will bring many crucial benefits to your business. 

Efficient processes enable you to capture, manage, measure and analyse all factors that affect the business’ profitability. If you’re in a business where your goal is to get the job done on time, on brief and on budget, disciplined processes are critical.

Competing business pressures often leave debt management by the wayside. Yet this is one of the most critical keys to managing cash flow. Just how efficiently you can minimise the lag time in your business – between purchasing or manufacturing product, or providing services, then billing the customer and finally collecting payment – is critical to your liquidity.

Change is inevitable in business and market trends may initially affect your cash flow. The best way to ensure a healthy cash flow at all times is to consistently review and analyse your cash flow position, your business plan and your operating efficiency. 

Sound financial management is integral to long-term success. For more guidance and tips on managing business finances, sign up to the Business Australia newsletter.

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