Cashflow is the lifeblood of the business as it reflects the funds you have available at any given time. However, business owners sometimes focus too much on profit, not cash flow, which can create a false perception of the financial health of their business.
To better understand your 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.
However, to make life easy, here are three best practices that can change how you manage your Cash Flow and keep you going with a positive cash flow.
Use an accounting software
Accounting software will help you keep track of your inflows and outflows of money. You’ll be able to track better your accounts payable, accounts receivable, assets, liabilities, taxes, customer payments, and Cash Flow.
There is three popular cloud-based accounting software for small to mid-size business owners: XERO, RECKON, and MYOB. Any of these three software can generate your Cash Flow Statement with a push of a button. Your job is to ensure that good data gets in so that you can get accurate reports coming out. The price starts from $15 to $25/ month at the time of writing.
The above accounting software will help you manage your bookkeeping and tax compliance obligations, allow you to see what you’re doing, and play a massive part in your cash flow.
I’ve given you the formula for improving your cash flow. By understanding each element, we hope you develop new ideas on pricing your services and products, buying fixed assets/ capital, and managing your taxes.
While we recommend you engage an Accountant to give you expert advice from time to time on managing your Cashflow, astute business owners know what comes in and out every day from a push of a button.
Pay Before You Serve
In the past, it may be odd to ask your customers, clients, or corporate account to have them pay in advance. But today, it’s almost a standard practice to pay for a service (or Products) upfront, in advance, or on the day a service is wholly rendered.
With many scams, frauds, and dodgy customers – engaging debt collectors to chase arrears can be an administrative somersault, especially if the amount is not huge.
Therefore, more and more business owners are adopting the “pay before we serve” policy. And if you are a business owner giving your customers 14 to 30 days credit terms, you may want to reconsider cutting it down to 7 days or adopt the “pay before we serve” policy.
Now, there are exceptions to the rule.
If your clients are in the top 100 companies or prominent business owners, you may consider the 14 days credit terms. After all, it is their Accounts Department that will be paying your invoice, not the Founder.
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.
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.
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.