HOW TO CASH FLOW LIKE A PRO IN 2020
What is Cash Flow?
Cash flow is the term used to describe the movement of money in and out of a business account every month.
There are two different types of cash flow, positive and negative, and yes, you definitely want to aim for positive cash flow if you want your business to flourish.
Without a healthy and consistent cash flow, running a business is challenging. Ensuring that you are aware of your cash balance at all times will help foresee any future cash flow issues and budget for them. Negative cash flow doesn’t ‘just happen’ it comes from poor management of your funds and expenses.
Positive Cash Flow: This occurs when you have more money coming into your account per month (paying customers and accounts receivable) than you have outgoing (rent, wages, mortgage, loan repayments ect). If your business doesn’t take payment on the spot your cash flow will be coming in from collection of accounts receivable.
Negative Cash Flow This occurs when your business is spending more money on expenses (rent, wages, mortgage, loan repayments ect) than money funneling in from paying customers or clients.
You’re running your own business and you’re busy – we get it. To give you a helping hand, we’ve put together some key insights that can assist you in managing cash flow.
MANAGING YOUR CASH FLOW
Positive cash flow is not something achieved by chance, it’s something you have to manage. Staying on top of invoices and expenses and monitoring money coming in will help you predict and mitigate dips in cash flow. If you are a seasonal business that relies on summer or holiday trade, you may want to do a yearly budget that allows for periods of positive and negative cash flow.
PROFIT vs. POSITIVE CASH FLOW
Tracking your businesses profits on paper or accounts can be deceiving as it does not accurately reflect your cash flow.
Monitoring invoices and expense receipts and calculating your outgoings compared to the money coming in is the most accurate way to forecast what your profits are and how much you will need to make for the next month. There are lots of tools available to help you, for example Xero will let you track expenses and invoicing for as little as $10 a month!
One major setback to be prepared for is clients not paying their invoices on time, in full or at all. A recent report outlines that small businesses in Australia are owed $26 billion by their customers. The Late Payments Study, commissioned by PayPal and Intuit Australia, shows that the average amount owed to each small business at any one time is $13,200, with more than a quarter forced to take out a loan to cover their own expenses. Making sure that you have legally binding contracts and a debt recovery plan in place will assure that you are paid the money you are owed before it affects your business financially.
LINE OF CREDIT
Negative cash flow is the most common reason for start up businesses to fail. With so much money going toward expenses and little money coming in it is very easy to find yourself in debt. The best solution to this is to take out a line of credit so that you have money in your chequing account for when you are in negative cash flow. This will give you time for your business to build traction and make payments when you start bringing in positive cash flow.
Below are our top 5 tips to best manage your cash flow
- Automated management of invoices and wages – Creating automated management of invoicing will mean that you make payments to your bank, suppliers and staff on time. Late re-payments or payment of staff can have financial and legal ramifications so keeping on top of your basic finances is extremely important.
- Send invoices as soon as products/services are received – Sending out invoices efficiently will assure that you have finances coming in regularly. Leaving invoices to the end of the week or month to send out will mean you delay your cash flow and may end up in the negative.
- Build relationships with suppliers – Creating relationships with your suppliers will benefit your business when you are struggling financially. Consistently paying invoices on time will make it more likely for businesses to extend invoice payment timeframes and organising trade credit when you need.
- Prioritise your payments – Updating a weekly list of urgent payments and invoices and working out time frames to which you will need to pay them will help to get a clear indication of what you need to make in the months ahead. Being aware of possible negative cash flow can be managed by reducing staff, adjusting stock levels and unnecessary expenses.
- Research your customers/clients – Being aware of the clients/customers finances that you are giving credit to is just as important as being aware of your own finances. If clients don’t finalise invoices on time this can negatively impact your positive cash flow and throw out your budgets for the month/year.
Driving a business towards success is the reason why you do what you do, but the reality is, it takes hard work and dedication to get to that point. Being realistic about your finances, rent, shop fit out, staff and stock will mean that you can grow with your business instead of it out growing you before you are financially ready.