Cash flow management tips for small business

February 6, 2018

Summer is an enjoyable time of the year. However, as many small businesses will testify, the fun and festivities mean many of our clients and customers take a break, which can put a squeeze on cash flow.

The thing is that with some analysis and planning, it’s still possible to keep the cash flowing.

Getting to grips with your working capital now

Working capital is the funds your firm needs to maintain its day-to-day trading operations. Therefore, understanding and accepting the amount of working capital your business needs to operate is the first step.

To determine your working capital, consider:

  1. How much inventory do you need to hold?
  2. How much cash is tied up in work-in-progress?
  3. What do your customers owe you?
  4. What is the gap between paying your suppliers for materials and extracting cash from your customers?

The costs of inventory, using suppliers and other business expenses soak up cash like rain in a desert. Therefore, it’s critical your business has enough money to fund your working capital needs.

Some SMEs might set aside three months’ worth of outgoings to cover your working capital. Other companies might not need such a robust financial war chest. However, every business owner should have a buffer, whether it’s some personal funds, an overdraft, a revolving line of credit or debtor finance to cover them for a rainy day.

Covering cash shortfalls in 2018

The start of the year is an excellent opportunity to prepare some cash flow forecasts for the next 12 months.

If you find it difficult to predict your sales, forecast all the outgoings first. Then establish how much revenue you need to cover your outgoings. This process also gives you some sales targets.

At the same time, seek ways to trim costs or improve revenues. If something or someone doesn’t save money or boost income, do something about it. Start by reviewing your suppliers and phasing out products or service lines that don’t fully contribute. Next, fire your ten worst customers (oh what bliss!) and bite the bullet with challenging, or unproductive, team members.

Offer simple payment options

Make it easy for customers to pay you. Always quote your bank account number very clearly on your invoices, and ask for direct credits or automated payments.

Accept EFTPOS and credit cards, and set up a PayPal account on your website. There is no reason in this digital age for you to wait for a customer to post a cheque.

This advice might sound like common sense, or you may have heard it all before. But it is helpful to jog your memory about the importance of cash management to ensure your business hums through 2018 efficiently.

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