The saying “cash is king” might be a trite expression, but it really is vital for all small businesses, especially when you consider that poor cash flow is the top reason for business failure. This means that getting on top of and remaining in control of your cash flow is essential for business success.
Neglect your cash flow and you’ll experience the pain and suffering that comes with failure in business. Take good care of your cash flow and you’ll be on your way to financial security.
One of the easiest ways to take care of your cash flow is to stop making the same mistakes every year that are literally draining your business of cash. Take action now and make the commitment to plug any leaks so you can put more of your hard earned money in your pocket. Listed below are our top 5 tips for managing and improving your cash flow to make more money in 2016.
1. Understand your peaks and troughs
All businesses have peaks and troughs and some are more evident than others. A peak cash month is when your cash balance is generally at its highest point during the year. The trough cash month is just the opposite.
When in a peak cash month, many business owners feel really good about their cash flow balance and make the mistake of using that money without considering that they will need it during leaner months. The inevitable trough month arrives and there is not enough cash to get through that period.
Look at your cash flow over the last 3 – 5 years and plot it on a graph to help you identify trends. Then identify your peak months and when you are most likely to expect a bad month.
Truly understanding your cash flow will help you plan and make informed decisions – e.g. you can use this information when marketing and maybe plan a special offer or sale during your trough months to boost your income.
2. Understand your business expenses
Take the time to list all of your monthly business expenses. This gives you your break even point – the amount you need to generate just to cover your costs and keep your business going. Now, if you compare your costs with your income, you can easily identify when you will experience potential cash flow problems.
Are there any months where there is not enough cash flow to cover your costs? Are there times when you have excess cash that can be held to cover costs in those leaner months?
This will help you understand whether you are in a position to invest in new opportunities or equipment. It can also help identify times when you may need to source additional funding. Banks are far happier to lend to businesses who really understand their business finances. It is also a good idea to speak to your accountant about this and make sure that you have included all costs. They can help you identify ways to reduce your costs and better manage your cash flow.
3. Pay special attention to capital expenditure
Capital expenditure can surprise you unless you actively manage and control it each month. A capital expenditure is recorded on your balance sheet rather than as an expense in your income statement. The cost of the asset you purchased is then depreciated over the life of the asset.
As a result, you don’t see the cost of that expenditure show up immediately in your income statement. It’s this accounting treatment for capital expenditure that makes it so important that you manage it closely.
4. Watch accounts payable closely
Delaying payment to creditors for as long as possible can give you a false sense of security as cash flow is temporarily boosted. Pay your bills by the due date to have a true picture of your cash flow position.
5. Evaluate your terms
If you’re having trouble with cash flow, check to see how well balanced your customer and supplier terms are. Are you having to delay paying suppliers because your customers are not paying you on time or are your payment terms too lenient? If necessary, change your terms so that your invoices are to be paid within 14 days instead of 30, allowing you time to pay your suppliers.
Remember, your success in business will ultimately be determined by the way you manage your cash flow. This does not mean that you have to do it alone. Call us today – we can review your business and identify ways to improve your processes.