Running a business can be challenging, and managing your cash flow is no exception. You might find yourself wondering what you should do in order to optimise the way money flows into and out of your company. To help answer this question, we’ll look at three best practices that will teach you how to control your finances effectively while creating profitable solutions along the way.
So if you’re looking for Smart Ways to improve the profitability of your business through better cash flow management – read on!
Cashflow is the lifeblood for all businesses
Cashflow is the flow of money in and out of business over time. It’s important to have a positive cash flow, which means more money flows into your business than out of it. A negative cashflow can indicate that the business struggles to make ends meet or fund operations. And to better understand the concept of Cashflow, here are two formulas: –
Definitions of each element:-
- Operation income = Gross Profit – Operating Expense (incl. COGS, Depreciation).
- Net Income = Total revenue – total expenses – taxes.
- Non-Cash Charges = depreciation, amortisation, other expenses that does not involve cash payment.
- Change in Working Capital = variation of Current Assets & Liabilities
- Capital Expenditure: Money spent on acquiring or maintaining fixed assets (land, buildings, and equipment)
- Taxes = relevant business Taxes.
To improve your cash flow position, you need to work on the above elements within the formula. As well, apply the three best practices below to ensure ongoing positive cash flow.
#1. Get Paid Before You Serve
It is becoming increasingly common for businesses to request payment upfront, in advance, or on the day of service delivery, whereas in the past it may have been considered unusual to do so. Unfortunately, due to the prevalence of scams, fraud, and dishonest customers who utilise services without paying, businesses are having to take a more proactive approach to ensure they get paid for the services or products they provide. Attempting to recover arrears can be a time-consuming and complicated process, especially if the amount owed is not significant.
As a result, many business owners are adopting a “pay before we serve” policy, which requires customers to pay for services or products in full before they are provided. If you currently offer credit terms of 14 to 30 days, it may be worth reconsidering this and either reducing the payment window to 7 days or adopting the “pay before we serve” policy.
However, there are some exceptions to this rule. If your clients are among the top 100 companies or are prominent business owners, it may be appropriate to offer a credit window of 14 days, as their Accounts Department will be responsible for paying the invoice, rather than the Founder.
#2. Apply the 2 Tenet of Cash Reservation.
- Ensure you reinvest 10-20% of your profit to build your cash reserve.
Let’s face it. When it comes to doing business, a cash reserve can help you get out of some sticky situations. Excellent cash flow forecasting and management can help scale faster, provide a positive cash flow, and prepare you for emergencies. Even in an economic downturn, you can make it through if you have cash. The ultimate goal is to increase your sales, which translates into increased reserves and cash flow. Monitor your expenses and try to keep them low. The higher your costs, the bigger the strain on your cash flow.
- Access Cash Reserve from your Equity
Another strategy for accessing cash reserves is through your properties. Presuming you have one or two investment properties or a family home with sufficient equity, you can draw out some equity to support your business during times of negative cash flow.
Some traditional banks will offer a line of credit, an Equity management product, and are willing to give you a massive business loan as long as you have equity under your name.
When you have good credit, you’ll have what you need to cover regular expenses (especially during busy seasons), buy equipment, hire staff, and keep things going without tapping into your cash reserve.
However, you need to have a good credit rating score to qualify for this privilege. A good rating demonstrates to others that you are worth the risk and pay your debts on time. Additionally, this helps you get business financing faster and lower interest rates.
#3. Create Multiple Sales channel
This strategy may not directly affect your cash flow management, but it can act as a buffer to prevent you from experiencing a negative cash flow status.
One of the keys to cash flow success is to improve your sales. You can do the following: –
- Offer discounts due to a sale.
- Create trip-wire products and attach an upsell on the product.
- Integrate a loyalty program to improve conversion.
- Sign up to Lead Generation websites to increase sales.
- Design your Check Out to make payment (paying you) easy.
[Bonus] Use accounting software to manage cash flow.
This is the easy part where by subscribing to accounting software and with proper data entry, you can print out cashflow reports.
Is even easier that your accountants are encouraging you to do the same.
Nowadays, accountants are shifting away from selling traditional bookkeeping services and instead, are encouraging their clients to subscribe to cloud-based accounting software such as Xero, QuickBooks, Reckon, or My0b. By doing so, clients can manage their bookkeeping themselves while their accountant receives a commission from the monthly subscription fee.
Using accounting software has several advantages, including the ability to track your inflows and outflows of money, monitor accounts payable and receivable, manage assets and liabilities, handle taxes, and keep track of customer payments and cash flow.
With the click of a button, any of the software mentioned above can generate your cashflow statement. However, it is important to ensure that the data entered into the software is accurate to receive reliable reports.
The cost of these accounting software packages ranges from $15 to $25 per month at the time of writing. In addition to bookkeeping, the software can also help manage tax compliance obligations.
While we recommend you engage an Accountant to give you expert advice from time to time on managing your Cashflow so you can become an astute business owner who knows what comes in and out every day from a push of a button.
Overall, savvy entrepreneurs understand the importance of cash flow management and have the right strategies in place to ensure their business stays running and successful. Taking these strategies into account will help you see the highest returns on your efforts while avoiding any pitfalls associated with poor cash flow.
In all things, be strategic about your business growth. That means checking your cash flow every month to check for any defects and contacting your trusted accountant if in doubt.
Running a business is an investment, so get a handle on forecasting what you have coming up and plan accordingly. You’ll be in tune with your business on a deeper level, will avoid cash flow problems, and will employ best practices that work across every industry.