4 min read
The Purpose of Forecasting in Business
Forecasting is vital for business success. It allows you to make informed decisions about the future of your business and helps you to stay ahead of...
Business cash flow management is one of the most vital aspects to ensure your small business can survive. Without proper cash flow management, even profitable businesses can fail. Small businesses are especially prone to cash flow management issues. So how can you improve your small business's cash flow?
Before implementing cash flow management strategies, it is important to understand the basics of cash flow and how it affects businesses.
Positive cash flow fundamentally means you have more money coming into your business than going out. Although this sounds simple even profitable businesses can struggle to have positive cash flow for reasons we will discuss later in this article.
Negative cash flow is the opposite and this is when you spend more money than your business is receiving. Although profit can play a role there are many cashflow strategies that can be implemented to turn a negative cash flow into a positive one.
Before implementing any cash flow management strategies, it is important to first have a detailed understanding of your cash flow. This can be done by creating a cash flow statement, which highlights previous cash inflows and outflows. This allows businesses to get a clear understanding of their previous cash flow.
Cash flow forecasting is another way to get an understanding of your business's financial health. Creating cash flow projections can allow businesses to gain insight into their business's outlook and track their actual cash flow against their future cash flow. Creating an accurate cash flow projection is complicated, Coleman Advisory can assist you in creating a cash flow forecast for your business through business coaching.
Although late payments may not seem detrimental, a build-up of late payments can ruin even highly profitable businesses. The build-up of overdue payments can create extended cash shortages and cash flow issues.
To prevent this, businesses should include clear payment terms and details of payment. This should include late payment implications, matters that impact price such as GST, limits on credit and more.
Coleman Advisory can assist you in setting up your payment terms and include all relevant details that relate to your business.
Even after these payment terms are created, businesses should also ensure they are accurately tracking outstanding invoices and the debtor days. It is also worth investing time into creating processes that target this.
For example, creating processes around follow-up calls and staff duties surrounding debts can create consistency and structure around accounts receivable.
Another business cash flow management strategy is to outsource to a debt collection agency. These agencies will either work on your behalf to collect the debt or they will buy out the original debt from your business. Either method will mean that you will lose a portion of the amount owed as a fee to the agency.
Using a debt collection agency should also be highlighted in the payment terms on your invoice, as agencies will often charge a larger bill if it continues to not be paid, and this needs to be communicated to customers.
Another popular option to improve cash flow is offering after-payment services such as after-pay. This is especially attractive for eCommerce businesses as it allows customers to purchase products without having the money to purchase them. These companies pay the business immediately and take the responsibility for payment by taking a small fee from the sale.
Accounts payable is also something that should be considered when focusing on cash flow management, as it will also help improve profit margins. This involves regularly reviewing your suppliers and comparing them to competitors to ensure you are being priced correctly, and ensuring your business is staying within its budget.
Coleman Advisory has experience with a range of businesses and can assist in reviewing suppliers to ensure you are being charged correctly and sticking with your budget.
A big part of cash flow management for small and large businesses is appropriate asset management. A big issue for a lot of businesses is having too much cash tied up in assets. This is particularly impactful if your assets are slow-moving and you are not aware of your upcoming expenses, as this can lead to severe cash flow problems.
However, the opposite issue can occur with shortages of stock leading to missed sales opportunities and cash inflows. This can be caused by several factors such as a supplier causing late deliveries or a poor cash position to purchase stock.
Businesses should be aware of how much cash is tied up in assets and how long it takes to sell these assets. Buying less stock may be a viable option even if the stock costs more per unit as you miss out on bulk purchase discounts.
This strategy is used to ensure that you can maintain a positive cash flow and avoid extended cash shortages. Assets that sell slowly may cause cash flow issues if you become overstocked and are required to discount the stock to increase cash flow.
By improving your asset management, you will improve your cash flow conversion period, unlocking more cash and ensuring you can pay expenses as they arise.
Managing expenses and attempting to reduce them is essential to manage cash flow correctly. Firstly, it is important to review and understand your expenses.
Creating budgets for your different operating expenses and regularly reviewing your budget is a great way to understand your expenses. By reviewing your budget regularly, you can understand fluctuations in expenses and adjust spending and your budget accordingly.
Regularly reviewing your expenses from suppliers and comparing them to competitors is a way you can cut down on expenses, improving cash flow and profits. Conducting market research can also help to see if you are being priced correctly compared to your competitors.
Utilising experienced accountants such as Coleman Advisory that have serviced a wide spectrum of businesses and are aware of how much you should pay suppliers is a great way to avoid paying too much.
Knowing exactly how much money you should be spending on expenses will ensure you are making good future spending decisions. Even with proper cash flow management, unexpected expenses can arise and you must account for this to ensure you are avoiding extended cash shortages.
A big part of poor cash flow management is a lack of gross profit control. There are lots of different ways you can increase your gross profit margin from implementing processes to simply increasing prices.
Setting in place budgets and ensuring the budgets are followed is an effective cash flow management strategy that can increase gross profit. By reviewing the spending of the budget, businesses can see if there are any areas that can be improved.
For example, a business reviews its budget and realises they sold out of items regularly and were forced to purchase more at retail prices, lowering its gross profit margin, so they set in place processes to minimise the number of times they are out of stock.
Regularly reviewing suppliers to ensure you are getting the best possible price is another viable option. Comparing your current suppliers with their competitors could potentially lower your cost of goods, therefore, increasing profit.
Building up relationships with suppliers and ensuring discounts are maximised is another way you can potentially increase profit by lowering the costs of products for your business.
The price of your products or service is something that should be monitored, especially considering inflation. Many businesses are struggling due to fixed price contracts or due to increases in supplier costs
. Regularly reviewing your prices and comparing them to your competitors by conducting market research is a good way to understand if you are charging too little and hindering your gross profit margin.
Another big part of maximising gross profit is accounting for and monitoring wastage. Wastage can destroy a business's positive gross profit margin. If a business is not accounting for wastage in its prices, then its gross profit margin will be lower than expected.
There are also many strategies that can be implemented to reduce wastage, but this will depend on each individual business and industry. Just by monitoring wastage, a business can see if it is an issue that should be addressed.
Increasing sales seems like a simple way to increase cash flow but it can be difficult. The two main ways to increase sales are through marketing and lowering prices.
Lowering prices to increase sales takes planning. Ensuring that you can maintain your prices and that your profit margin is still palatable is essential. Even if you lower your prices there is a chance your sales won't increase as significantly as you planned, meaning your business's cash flow is in a worse position.
Having a proper marketing strategy in place is a great way to increase sales. Having strategies to increase lead generation, customer retention and conversion rate can increase sales if the strategies are relevant and well executed.
It is important to closely monitor your marketing efforts to ensure it is effective and will not cause further cash flow problems.
Being aware of key performance indicators is a great way to measure the success of your marketing strategy. Measuring attributes like return on investment can highlight if your strategy isn't working and if it should be modified.
Throughout this post, we have highlighted many ways in which your business can improve its cash flow and avoid cash flow problems. Despite this, we have only scratched the surface of cash flow management.
Coleman Advisory is experienced with managing cash flow and can conduct a cash flow analysis to highlight any cash flow problems and offer a tailored solution to your business.
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