14 tips for managing your business cash flow

If cash really is king, then perhaps it doesn’t always get the respect befitting of a monarch from some small business owners. Take for example a business that can’t pay its debts and slips into insolvent trading territory. That’s certainly no way to treat royalty.

Cash flow is money coming in and money going out of your business, and having a firm understanding of the concepts of cash flow and cash flow management can be fundamental to the success of your small business.

Understanding the three types of cash flow

Cash flow for small business can be grouped into three categories.

Cash flow for operating activities

The operating cash flow is how much money you spend and generate each day. The cash flow is the money you earn from your sales and regular expenses, such as employee salaries, supplies, and commercial leases or small business insurance*. It can be crucial to calculate your operating expenses because they help you determine your profitability. This is a good indicator of the financial health and performance of your business.

Cash flow for investment activities

The money generated and spent on your investments is what you call capital assets. Capital assets is the fancy name for these assets. They can be long-term assets like property, equipment, or stocks and bonds. This includes the purchase or sale of a company. This type of cash flow can vary greatly depending on the industry you are in.

Cash flow for financing activities

Financing cash flow is money that flows between the business owner, creditors and investors. This includes debt, equity, dividends, and other forms of financing.

This type of cash flow may not be available to you depending on the structure of your business. This type of cash flow, however, is important as it is another indicator of your financial performance even if you have negative operating expenses.

Positive cash flow, for example, may mean that the business is bringing in more money, increasing its assets. Or, that the business owner is borrowing more money because the company’s earnings are not enough. A negative cash flow could indicate that you are repaying debts, which financial institutions and lenders may want to see.

Not managing your business finances wisely could spell disaster for your business. Cash flow for small business, along with other business essentials such as a business development plan and business insurance, can make or break a small business.

How to manage cash flow in your business

So, do you know how to manage cash flow in your company? Here are 14 financial management tips for small business. These essential tips can provide answers for how to fix cash flow problems in your small business.

1. Keep your financial records up to date and accurate

Effective cash management in your small business will only ever be as accurate as your accounting and reporting. Staying on top of business cash flow management can be tricky, especially during busy periods. But a bigger challenge will arise if you let yourself get behind with your accounting and reporting.

To avoid that happening, be sure that your financial records are routinely updated. The benefit here is that you will be able to clearly see where your business stands financially at any given time.

A simple way for how to manage cash flow in a company involves strategic cash flow forecasting and business cash flow management can help you to monitor when money is coming in and going out of your business.

Having this visibility enables you to anticipate when you will have surplus cash available and when you can expect to experience shortages, while also providing warning signs that can help avoid future financial problems. Having a strong grasp on the financial forecast of your business will help you to confidently make decisions throughout the year.

2. Build up cash reserves to reduce risks to your business

Having or not having access to cash can make or break your small business. One of the most important steps in managing cash flow well is to build up a cash reserve, which can provide a buffer to help you manage unexpected events that may negatively impact your business.

Business insurance such as Public Liability insuranceBuilding insuranceContents insurance, and Business Interruption insurance can help you keep your cash reserve at a comfortable level by paying for claims or lawsuits that can easily run into the thousands of dollars.

Cash flow also enables your business to benefit from opportunities as they come up, while also reducing the financial risks to your business. It also gives you the confidence and financial backing you may need to grow your business.

While you might need to pay yourself slightly less for the time being, in the long-term this strategy can put your small business on the path to success, which is obviously the ultimate goal for a small business owner.

3. Be lenient with your customers – to a point

Your customers will appreciate some leniency with their payment terms, especially when business slows. Giving them extensions on their payments can help engender trust and loyalty and demonstrate that you have faith in your customers.

However, it’s important for your own business that you only be lenient to a point; don’t be pushed around, because your priority is ensuring the success of your own business. Be fair and direct, but never be a pushover. Set the terms that first and foremost work for your business.

4. Keep it as simple as possible

If you’re not confident with numbers, don’t despair as there are knowledgeable and useful resources available to help. You may hire a professional accountant to help manage your business finances. Or if you are doing it yourself, there are many accounting software products available that help simplify and speed up the process of managing cash flow for small business owners.

5. Segment your finances

A simple but essential business cash flow management tip to help small business owners improve day to day cash flow is to keep your personal bank accounts and business bank accounts separate. You may even have each of them with different banks just to draw a clear line between your business funds and your personal funds. This can help avoid you accidentally confusing them.

Recommended reading: How to Manage Your Finances as a Contractor

You don’t want your business funds going into your personal account and vice versa, because doing so can make it very difficult to gain visibility and a true understanding of how you are tracking financially as a small business owner.

Common cash flow terms to commit to memory include:

  • Accounts payable: The funds you as the business owner owes to suppliers and service providers.
  • Accounts receivable:The funds customers owe your small business as a result of the services or products you have delivered.
  • Assets: Items and resources that belong to your business that you use to in your business to generate income.
  • Break-even point: Where the total costs and total revenue in your small business are equal – your business hasn’t lost anything, but neither has it gained anything.
  • Burn rate: The rate at which your small business uses its capital before it becomes profitable.
  • Cash flow analysis: An in-depth look at your company’s cash to determine how much funds are available to run your business.
  • Cash flow statement: An official financial document that shows the amount of cash entering and leaving your business during a given period (monthly, quarterly, annually).
  • Free cash flow: The money that remains after you have paid your operating expenses and obligations.
  • Liabilities: The outstanding debts your company has (loans, mortgages, unpaid bills, and so on).
  • Liquidity: The ease with which an asset or security owned by your business can be converted into ready cash without affecting your business.
    Negative cash flow: When your business is spending more money than it is generating.
  • Positive cash flow: When your business is generating more money than it is spending.

6. Create a cash buffer for emergencies

One simple way for how to fix cash flow problems in your business is to have an emergency fund for your business, as you would for your personal finances, can help you to be prepared for any unexpected expenses or cost increases. This can be invaluable for your business when the unexpected happens to your business.

While you are at it, you may also consider taking advantage of your lower balance to adjust your repayments to the minimum repayment amount, which will also help improve your cash flow. But remember – lowering your repayments will reduce your available redraw balance over your agreed loan term, so consider that too.

7. Make your finance work for your business

If you have business finance in place, consider how it is being managed. If you are not sure, you may benefit from reviewing your current finance and discussing it with your bank.

8. Get paid faster

Your cash flow will increase if you receive payments quicker. Sending invoices immediately after delivering your service or goods is one of the best ways to increase your cash flow.

Mobile EFTPOS devices allow your customers to make payments on-the-spot and receive settlements the same day, eliminating invoice delays in a terminal that is all-in-one.

9. Review your terms of trade

Consider reducing the payment terms you offer your customers, especially if it is longer than 30 calendar days. If a customer is unable to pay regularly, you may want to review your terms of supply. Think about offering a discount to customers who pay early or putting a statement in your invoices and quotes that indicates you reserve the right of charging interest on late accounts.

10. Review your inventory

Conduct frequent inventory counts to ensure you are only holding as much stock required to run your business efficiently. Excess stock can tie up cash and increase storage and insurance costs.

11. Budget your spending

If you’re a start-up, it can be easy to overspend as you try to make an impact. Keeping key jobs at the top of your list of things to do can help you to prioritise things such as launching or promoting your business. Thinking about the cost and the relative benefit it might bring can help you assess what you need to do and what might be an ‘impulse spend’.

12. Avoid paying early

It’s also worth checking your suppliers’ payment terms and making sure you don’t pay early if you don’t have to. For example, if a payment is due in 30 days, don’t pay it in seven days unless there is a discount for early payment. This will help you keep money in your account for longer.

Using a business credit card to pay suppliers can be a way to manage cash flow, so long as you can pay your closing balance in full at the end of each month to avoid having to pay interest.

13. Defer your payments whenever possible

Remember that the later you send payment to suppliers, the longer your cash is available to and earning valuable interest for your business. With digital banking, you can set up a direct debit to pay recurring expenses on the final day they are due – just before you get hit with a late fee from your bank. Of course, the flip side of that is negotiating early payment discounts with suppliers if you find yourself with a positive cash flow.

14. Have a plan B

At some point, you may well need emergency money ash for your business. Preparing for unexpected expenses is essential. Besides building up a cash reserve, you’ll also want to keep accurate bookkeeping records, so you know your liquid assets and what costs you can shift.

Keep abreast of your credit score so you can access favourable terms on business loans or lines of credit that your business may require moving forward, even if it’s taken at the last minute. Using a business credit card will boost your business credit standing and give you a source of emergency funding.

Common causes of cash flow challenges for small business owners

Cash flow problems are not unique to your business; at some point every business experiences cash flow challenges. Here are some common cash flow challenges for small business owners.

Not having enough cash in reserves

As a general rule, it is recommended that you always keep three to six months’ worth of working capital on hand as a buffer. Making a cash-flow business plan. You may address the gap between your incoming and outgoing cash flow in your cash flow plan.

Not having a cash flow business plan

Consider addressing the gap between your incoming and outgoing cash flow in your cash flow plan.

Growing too fast

You may find that your cash flow becomes strained if you grow too quickly. This is because your up-front costs are tied to customer demands which have not yet materialised.

Not accurately tracking your cash flow projection

It’s considered vital to monitor your incoming and outgoing cash flow at least once a month, but possibly weekly or even at the end of every day.

Getting your pricing wrong

You will very likely scare away customers if you charge too much for your products or services. On the other hand, if you charge too little, not only will your business earn less, but your customers may not value the products and services that you offer.

As a small business owner, cash flow is as critical to the long-term success of your business as small business insurance such as Public Liability insurance is. Get your small business insurance quotes sorted quickly and easily online with BizCover by calling us on us on 1300 920 864.

*This information is general only and does not take into account your objectives, financial situation or needs. It should not be relied upon as advice. As with any insurance, cover will be subject to the terms, conditions and exclusions contained in the policy wording. © 2023 BizCover Pty Limited, all rights reserved. ABN 68 127 707 975; AFSL 501769.

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