Are you aware of the cash flow at your small business? It could be a matter of life or death for your business, as cash flow often acts as the lifeline keeping a business afloat. A lack of cash flow planning has proven to be the demise of many Australian businesses, with studies finding that 68% of small businesses become insolvent because of bad cash flow analysis.
Over my career in finance, including as a Finance Manager and CEO, I’ve seen these scenarios happen time and time again. It’s crucially important for small businesses to remain on top of income and expenditure and know how to maximise cash flow.
When small business owners ask me for my advice on cash flow management, I always share with them these four tips.
1. Be Organised To Stay In Control
You always have peace of mind when you know your cash flow position. As money is continually coming in and out of the business, you need to know your incomings and outgoings and budget accordingly to maximise cash flow.
Making a habit of entering your receipts and payments and reconciling your accounts daily is a great start. It’s easier to know what an item is for when it’s new. For example, if you use a credit card for business, it’s very hard to remember what each amount is for when it’s 30 days old. Making a daily reminder to enter invoices into your system is a great way to stay organised and on top of your expenses.
Similarly, set a day when you make your payments, ideally once a week. This will ensure a structure and makes it easier for staff when suppliers call wanting to know when payments are made. Ensuring your invoices are paid on time also gives you better negotiating power with your suppliers at annual review time.
It’s also important to not be afraid to ask the hard questions when it comes to expenses. Always question suppliers when income and expenditure is not in line with your expectation. If an invoice comes through that doesn’t align to the quote or budget, ask the supplier straightaway. It may be a mistake or might give you an indication of cost blowouts in your business.
2. Complete A Monthly Budgeted Cash Flow
To manage the money coming in and out of your business, complete a budgeted cash flow of your income and expenditure at the end of each month. This allows you to stay on top of your incomings and outgoings and find any discrepancies that may cost your business, including under-forecasted income or over-budgeted expenditures. If you do find any discrepancies, you need to follow up and check for the reasons behind the mistake.
If you find your projections are unrealistic, check your accounts payable and accounts receivable and follow up straightaway. Reconcile this against your sales pipeline and update your cash flow based on expected sales. If your expenditure comes out over projections, check to see if any forecasted payments have been made early and adjust accordingly.
It’s important to ensure you haven’t paid a monthly payment twice in one month, which may occur when paying rent. It’s also worth checking large invoices and comparing them to quotes and following up on any unbudgeted expenditure. When you identify errors in your expenditure, create a process to make sure it doesn’t happen again.
3. Budget For Tax Liabilities
If your accounting system is up-to-date it will give you the amount of GST and PAYG you owe. To maximise cash flow, put these forecasted GST and PAYG tax liabilities in your cash flow budget.
To ensure further maximisation, schedule a tax planning session with your accountant by April each year. In this session, bring details of your income and expenditure for the year to date plus your forecasted income and expenditure until the financial year end. Based on this tax planning, you will be able to work out how much money you need to put aside each month to cover tax, and add this expense into your cash flow forecast. If possible put the money aside each month in an interest-holding account.
4. Set A Realistic Budget
A common pitfall in small business is underestimating projected costs. By undervaluing your outgoings when drawing up a contract, the unaccounted expenses may cost you in the long run.
With this in mind, it’s important to ensure tight agreements with suppliers to maximise your business’ cash flow. Internally, it’s also vital to create a policy specifying no current or forecasted expenditure can be made without adding it to the cash flow forecast. You have to be especially careful of unbudgeted expenditure and cash flow implications as a result of a large sale or contract.
Is your head still swimming when it comes to cash flow? For more assistance in simplifying the process, why not try out Reep? Reep gives you a continually updated forecast of your cash flow anywhere, at any time.