As we enter the new financial year, many of us are feeling the economic squeeze. With the cost of groceries, petrol, rent, and interest rates on the rise, discretionary spending is taking a hit, this is affecting businesses as well as households.
To help your business keep its financial head above water, here are some essential cash flow tips to help navigate these challenging times.
Understanding cash flow
Cash flow is more complex than simply tracking sales and expenses. It encompasses all inflows and outflows of cash in your business. Inflows include sales of goods and services, but if your customers pay on terms, the work you do doesn't immediately translate to cash in the bank. On the other hand, outflows include fixed costs like rent and wages, as well as discretionary expenses like purchasing new assets or hiring staff. These will come at you, regardless of the cash you have in the bank.
Key components of cash flow
- Inflows: Revenue from sales, loans, and investments.
- Outflows: Payments for rent, wages, suppliers, loan repayments, and discretionary spending.
- Working capital: The money needed to cover timing differences between inflows and outflows.
Understanding these components is crucial because even profitable businesses can face cash flow issues due to timing differences in payments and receipts.
Assessing your cash flow situation
To manage cash flow effectively, start by reviewing your financial statements. Identify patterns in your inflows and outflows, such as regular rent and salary payments, supplier payments, and loan repayments. Use tools like spreadsheets or financial management software to track these patterns and forecast future cash flow needs.
Your bookkeeper can help you take a bird’s eye view of your cash flow and reconcile your accounts so everything is up to date.
Creating a cash flow forecast
To take a forward look, work with your bookkeeper to do the following:
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List bank accounts: Start with the opening balance of all your bank accounts.
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Categorise transactions: Group similar transactions (e.g., salaries, rent, utilities) to simplify tracking.
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Forecast inflows and outflows: Estimate your sales and other income, and list all expected expenses.
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Calculate net cash flow: Subtract total outflows from total inflows to determine your net cash flow.
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Adjust for non-cash items: Exclude non-cash expenses like depreciation and provisions for more accurate forecasting.
A cash flow forecast helps you anticipate cash shortages and plan accordingly, ensuring you have enough funds to cover essential expenses. However, as Mike Tyson says, “We all have a plan until we get punched in the face!”.
There is no ‘perfect’, but at least you can work towards it and feel more in control.
Strategies for improving cash flow
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Enhance cash inflows
The obvious first steps, although these can be easier said than done:
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Increase sales volume: Boost your sales through marketing efforts, promotions, or expanding your customer base.
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Raise prices: Adjust prices to reflect increased costs, ensuring you maintain profitability.
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Improve collections:Encourage customers to pay promptly or offer incentives for early payments.
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Reduce cash outflows
You can look at what’s going out and take steps to change things so you’re not always scrambling to find cash at the end of the month to pay bills.
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Control discretionary spending: Delay non-essential purchases and investments.
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Negotiate payment terms: Arrange to pay suppliers on specific dates rather than when the bill comes in. Most will be happy to accommodate a set pay date, especially if they trust you will always pay.
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Cut unnecessary costs: Review and eliminate subscriptions or services that are not essential to your operations.
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Managing debts and liabilities
Consider using the debt snowball method to tackle debts. Start by paying off the smallest debts first to achieve quick wins and build momentum. Gradually move to larger debts, applying the freed-up cash flow to subsequent repayments.
This can feel counter-intuitive and it’s not personal financial advice, but an approach like this can save you from having to consolidate your debt and it generally feels empowering to know you have eliminated a debt completely. Make your regular repayments on all debts, but focus on the smaller one first, then direct the funds to the next one up.
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Building an emergency fund
An emergency fund covering three months of operating expenses can provide a crucial buffer against unexpected financial shocks. This fund ensures your business can continue operating even during periods of reduced income, and will reduce your cash flow worries.
Practical tips and best practices for better cash flow
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Regular financial reviews
Conduct monthly reviews of your financial statements, including profit and loss and balance sheets. Regularly monitor your bank account balances to stay on top of your cash flow situation. This proactive approach helps identify potential issues early and allows for timely corrective action.
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Use financial management tools
Leverage financial management software like Xero or QuickBooks to automate and streamline cash flow tracking. These tools can provide valuable insights and help you make informed decisions.
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Consult professionals
Engage with your bookkeeper or accountant for advice on cash flow management. They can assist with creating accurate forecasts, budgeting and identifying areas for improvement. They can also give you a ‘heads up’ when your cash reserves are dropping.
Cash is king and it’s the lifeblood of your business. By understanding the components of cash flow, assessing your situation, implementing strategies to enhance inflows and reduce outflows, and leveraging professional help and financial tools, you can navigate the challenges of the new financial year and start to build on your profits as well as having better control of everyday incomings and outgoings.