Managing cash flow is one of the largest issues business owners face and in the current economic climate, cash flow management is more critical than ever. Many business owners do not attempt to create a cash flow forecast because they feel it is impossible to predict the unpredictable.
To solve this problem, BDO’s Financial Education team has developed an easy to use, online cash flow forecast tool to help you map the cash flowing in and out of your organisation. It separates your wage commitment and Australian Taxation Office (ATO) tax and super obligations to predict how much cash the organisation has for the next 90 days.
Before getting started though, It is important to understand the seven simple strategies to help stretch and improve the amount of cash available for your small business. There are three ways you can increase the amount of cash flowing into your business and four options for reducing the amount of cash flowing out.
How to increase the amount of cash flowing in:
- Pricing - lift your prices, focus on profitable revenue streams and provide more value
- Volume - increase your customers, expand into new markets or develop new products/services
- Accounts receivable - invoice earlier, follow up frequently and reduce payment terms.
How to decrease cash flowing out:
- Expenses - reduce your overheads, identify and reduce discretionary spend
- Assets - consider what can be converted to cash, sell underutilised assets or leaseback
- Human resources - match staffing levels to demand, change staff mix and reduce turnover
- Inventory - reduce costs, improve terms with suppliers and clear slow-moving stock.
Cash in strategies
Setting the right price for your product or service will help maximise profits. Increasing the price of your product or service (to a point that does not impact on customer demand) will have a positive impact on cash flow.
Consider what products or services you can bundle together. Focus on lifting your average transaction amount. If you can get each customer to buy a little more you will see an immediate improvement in your cash flow.
A word of warning, if your pricing strategy is not right, selling more products or services will result in more cash flow, but not profit. Ask yourself, have you analysed what margin or mark-up you need to cover all the costs of goods associated with selling your product or service? When selling products do not forget to factor in freight, merchant fees and even discount costs. If you have a service-based business you should include direct wages, commissions and subcontractor costs.
A strategy that focuses on increasing the volume of sales will have an immediate impact on cash flow. The easiest way to increase sales volume is to sell existing or new products or services to your existing customers. If you have a customer database, send an email about your business or reconnect with your customers. Can you offer a new product or service? Is there an opportunity to sell to new customers?
Improving your sales process by reducing the time it takes to convert an enquiry into a committed sale will also have a positive impact on your cash flow.
The fastest way to improve your cash flow is to call on your debtors (people who owe you money). These should be listed in your accounting software as accounts receivables. You should always make it easy for customers to pay you. Offer credit card or direct debit payment options. Automate your invoice reminders and the process of issuing statements.
Service-based businesses should send progress invoices, consider invoicing an amount upfront and on completion of a project. Can you afford to offer an early payment discount or implement a late payment penalty?
In the current economic climate, it is critical you stay on top of your accounts receivable.
Cash out strategies
Step one, reduce your cash outflows! The first place to look is in discretionary spending or non-essential expenses, for example, donations, gifts for clients, entertainment and staff amenities. Do you have any expenses that can be deferred? Could you negotiate better terms such as a discount for early or upfront payments?
Reducing overheads is going to immediately free up your cash flow. Scrutinise all your operating expenses. Call your utilities or phone provider and ask for a better deal. Review your insurance policies, check all your software subscriptions. If cash flow is tight, you need to tighten up your expenses.
Most business owners fail to consider converting assets to cash to help manage their cash flow. To find assets to achieve this, you need to review your Balance Sheet. Look for the Current Assets section. A Current Asset is something that can be converted into cash within the next 12 months.
If you have assets listed on your Balance Sheet that are underutilised or no longer required, consider selling them. Could you refinance assets to get better terms from a different lender? When purchasing an asset consider if leasing might free up your cash flow allowing you to pay for assets over a longer timeframe rather than in one lump sum.
Matching staffing levels to demand will help reduce unnecessary overheads and conserve your cash. Many businesses have cut back on staff hours, as the economy opens up make sure you plan for increased wages expense.
Obviously, better staff retention will reduce the costs associated with hiring staff. Consider what you could do to keep your staff engaged. This does not necessarily mean increasing their salary, often staff find professional development or training to be motivating. Employ staff who are aligned with your business goals and create a positive work culture.
If you sell products, you have a Catch 22 scenario – you need to spend cash to buy products before you can sell the product and recoup the cash. This cycle makes inventory a critical focus for cash flow management. There are three options for inventory management.
- Reduce the cost of your stock or materials by re-negotiating with your existing suppliers or finding new suppliers. Focus on improving your terms with suppliers, ask for extended payment terms or to be notified of discount or bundling opportunities.
- Review stock levels and clear obsolete or slow-moving stock. You want to reduce the amount of cash tied up in unsold inventory. Here is a tax tip: if you find obsolete or out of date stock that your business cannot sell, you can write it off before 30 June and get a tax deduction in that financial year.
- Can you change your ordering process? Look for ways to reduce the time between placing and receiving an order. Could you take a deposit from your customer before ordering the product? Is there a way of automating the purchase process?
Managing cash flow is a critical issue for most business owners. With an up-to-date cash flow forecast tool, you can predict how much cash you have and when it is likely to run out. BDO can assist with calculating your cash position and can provide strategies to preserve and stretch your cash flow further.
BDO’s Financial Education team has built an easy to use cash flow forecast tool to help you manage this critical finance function. You can access this tool via either our self-paced, online course or a half-day virtual workshop.
If you would like to learn more about strategies to improve your cash flow, download our eBook.