For small-to-medium businesses in particular, cashflow is one of the most important elements of business financial health. In fact, inadequate cashflow is one of the major causes of business failure.
So, what is cashflow? And how can you calculate, plan and manage it to your business’ financial advantage?
Cashflow measures the net amount of money going in and out of a business over a set period of time. It also shows the financial health of a business by helping you to understand your ‘liquid cash’ position and helps you predict how much cash you can expect to have available at any given point when used for forecasting.
Managing your cashflow is essential for planning ahead. You’ll be in a much stronger financial position if you understand how much cash you need, where it’s coming from and how long it takes to get it.
Here are some steps to help you with your cashflow management:
1. Understand Your Working Capital Requirements
Understand the amount of working capital your business needs to keep running. You’ll want to consider how much inventory you need to hold, what payments are due and when, and the length of time it takes to cycle from cash out to suppliers to cash in from customers.
2. Establish Your Working Capital Needs and a Buffer
Make sure your business has enough cash in the bank to meet your working capital needs. You’ll also want to ensure you have a buffer – either business savings, personal funds, overdraft or a revolving credit facility to fall back on in the event of a rainy day.
3. Plan Ahead
The unexpected will always happen, and it’s never a good thing to find out that you can’t survive when it does. Plan ahead by preparing cashflow forecasts for the upcoming year as well as a month-by-month basis.
4. Review Your Systems
Review your systems to ensure that you’re invoicing your customers regularly, and that you’re consistently updating how much is owed to you and how much you owe. Always review incoming invoices as well to ensure charges are accurate.
Your accounting invoicing software keeps track of outstanding payments and sends automatic reminders when invoices are overdue. Income is updated automatically when paid, so you always know where you stand.
5. Speed Up Your Cash Conversion Cycle
A cash conversion cycle measures the time span between disbursing and collecting cash. You can speed up this timeframe by asking for a deposit, putting customers on retainer or requesting monthly payment. You could also cut back your inventory levels or negotiate shorter delivery cycles or longer payment terms with your suppliers.
6. Make it Easy for Customers to Pay You
Always give your bank account details on your invoices, accept EFTPOS and credit cards, and set up a PayPal account. The easier you are to pay, the quicker you can receive funds and the better your cashflow position will be.