The best ways to manage cash flow!
Cash flow is the lifeblood of your business.
Over 60% of companies that go out of business are profitable, they just ran out of cash. Managing your cash flow properly is absolutely essential.
Here are some key steps to take to ensure you're managing cash flow effectively for your business...
1. Evaluate your current cash flow needs.
Understand the amount of working capital you need to operate.
How much inventory do you hold? Are you behind in your invoicing? How much do your clients owe you? How much time is in between you paying your suppliers for materials and gaining the cash back from your clients?
2. Make sure you have a buffer.
Keep enough cash in the bank to fund your working capital needs. An old rule used to be to keep three months worth of outgoings squirreled away, however that is not applicable or possible for every business. Just make sure you have a buffer that is realistic, sustainable but enough to cover costs when the unexpected occurs.
3. Set cash flow targets.
Prepare and maintain a cash flow forecast. Update it regularly (even as often as weekly) to provide an accurate prediction for the next six months to a year.
If you find it hard to predict sales, complete all your outgoings first and then see what sales targets you must meet to cover your outgoings.
4. Update your internal systems and procedures.
What changes do you need to make to manage cash flow more effectively day-to-day? Are you quick to invoice your customers? Do you check your supplier costs to make sure you’re not being overcharged? Do you make sure all time, costs and disbursements are added to invoices?
5. Make it easy for clients to pay you (and follow up when they don’t)!
- Offer fixed rate packages where clients can be billed in advance.
- Always put your bank account number on your invoices.
- Ask for Direct credits or automated payments.
- Accept EFTPOS, credit cards and PayPal payments so clients aren’t limited by how they can pay.
- Always avoid Cheques wherever humanly possible.
- Have a procedure in place for following with clients if they haven’t paid after a certain amount of time.
6. Embrace the cloud.
Cloud based accounting saves time and resources. But most importantly it gives you real time access to your financial situation from any device, so you can always monitor your cash flow.
Using cloud-based tools will also remove the need to have an employee spend lots of time managing the cash flow side of things.
7. Buddy up with your bank.
Banks can offer you useful services like credit or overdrafts. Develop a good relationship with your banker, tell them when you know of unexpected outgoings and changes, keep them up to date and they will see and appreciate that you have control of your finances.
8. Put the focus on cash flow, not profit.
Most businesses have forecasts of their profit margins years in advance, but they don’t have an up-to-date cash flow plan.
“If your cash flow is in order, your profit will be in order. Don’t be blinded by profit margins” – Agnes Cserhati, AC Powercoaching
If you need to consult with a professional about managing cash flow for your business, get in touch.