Ask us how: Cash Flow Management

Posted by Michael Derin
Published on October 16, 2013 under NSW Business Chamber Partnership

We all know cash is king and in today’s ever changing and diverse landscape the more that sits in your bank account the more opportunity your business has.

A Cashflow management report has become one of the most powerful reporting tools for businesses needing to closely manage their cashflow and they are seeking guidance from advisors in order to remain on top of it each month.

So what is cashflow? It is a report that shows a company’s inflows and outflows over a specified period.  The report will normally begin with a starting balance and generates an ending balance after taking into account all cash receipts and paid expenses during the period.

This day and age, businesses are trying to forecast what their cashflow position will be over a long period of time in order to manage the inflows and outflows more effectively.  In this instance timing is everything and having the right cashflow forecast in place will show you if/when you need to borrow money, how much you would need as well as when/how it can be repaid. 

In either case, cashflow management is a necessity for the survival of many businesses today.  Here are some top tips to good cashflow management:

1. Understand your cashflow or operating cycle
In particular, you should know the time lapsing between the purchase and sale of goods/services and the ultimate collection of payment from customers.

Now increase your operating efficiency and collect cash quicker.  How?

• Improve operational processes
• Reduce excess stock

2. Increase your profits! And I do not mean your sales or gross margins
Increasing sales are likely to improve profitability.  Remember increased sales may burden your short term cashflow, particularly if you have an extended operating cycle period and sales margins are low.

By reviewing and modifying your business structures and costs you are likely to improve profitability.  Be wary of cutting costs that may have a negative impact on your business, such as investment in staff, marketing or technology.

3. Reduce collection period
Reviewing and improving your credit collection policy will significantly improve cashflow.

Tips include:

• Screen your customers more carefully
• Offer incentives for earlier payment
• Provide progress payment terms
• Set realistic credit limits; and
• Follow up accounts quickly

4. Extend payment and trading terms
Using trade credit where available and calculate benefits for making prompt payment to your creditors.

5. Business Finance Facilities
Putting in place finance or overdraft facilities is likely in the long run to reduce the time and effort involved in managing cashflow.

Typically, trying to obtain cash from your bank when in serious need is near impossible.  On the other hand putting facilities in place while business is performing well is likely to prove effective in the long run.

The ATO charges over 12% on outstanding tax obligations, well in excess of most business working capital facilities.

6. MOST IMPORTANT OF ALL – Create a Cashflow Forecast
A cashflow forecast is a projection of your business cash inflows and outflows over a period of time.

Preparing a cashflow plan will:

• Provide early warnings of potential cash shortages so corrective action can be taken quickly
• Identifies if additional funds will be needed
• Assists in preparing requests to financiers for additional funding by demonstrating that the business can meet repayments
• Identifies potential surpluses than can be invested to generate additional income
• Helps manage tax obligations

Your cashflow forecast should be prepared monthly and extended out for the next 3 months as a minimum.  Keep them conservative as the impact of a cash crisis can be severe.