There’s a saying about business that “cash is king” and cash flow is the lifeblood that keeps the kingdom alive. Without cash, profits are less meaningful. While your business might seem profitable on paper, if the amount of cash coming in doesn’t exceed the amount of cash going out, you could be in for a world of trouble.

Basically, cash flow is the movement of funds in and out of your business and should be monitored on a monthly basis at the very least. There are essentially two kinds of cash flow – positive and negative – and, you guessed it, you want to see positive cash flow in your business. Achieving this takes work, analysis and management. One thing to remember, profit or receivables (on paper) are forecasted earnings and do not equal cash flow.

What is a cash flow crisis?

Cash flow problems can happen when business owners aren’t prepared. For example, if a client who owes you $10,000 pays you a month late, you might not have the cash on hand to temporarily replace that money to cover your overhead expenses. This can lead to a huge strain on your business and potentially even halt your operations.

So, here are 5 tips to manage your cash flow in times of crisis.

  1. Getting control of your cash flow

Can you answer these two questions?

  1. What is my cash balance right now?
  2. What do I expect my balance to be six months from now?

If your answer was something along the lines of ‘no’ or ‘I don’t know’, then you need to consider getting your cash flow under control.

It’s vital to understand whether or not your business is creating the type of cash flow it needs to survive and grow. Understanding your cash flow projections allows for you to make better business decisions, for taking care of your existing position and future growth or expansion options.

  1. Start by setting goal-oriented budgets & understanding the sources & uses of your cash

Set targets for the next six to 12 months to keep track of your finances and avoid any potential shortfalls. Of course, the simplest way to do so is to set up a cash flow forecast. This can be as simple as a spreadsheet listing income and costs on a monthly or weekly basis (depending on your business’ cash requirements).

It’s important to factor in fixed and variable costs to your cash flow forecast and be realistic! Fixed costs are expenses that don’t change as a function of the activity of a business within the relevant period, for example your rent or utility bills remain unchanged irrespective of sales. On the other hand, variable costs are those that vary depending on your production volume such as raw material costs or commissions. For example, if you run a café, the more cups of coffee you sell, the more coffee you need to buy and the more casual staff you are more likely to need.

While you might already have a forecast in place, have you considered the little things like seasonal variations? We have just reached winter, which means your electricity bills might be increasing as you reach for the heater on those early mornings in the office. Or perhaps this is your busy season and you need to employ extra casuals or contractors

Having a complete view of your business’ entire financial affairs is key to cash flow management success. The resulting insight of understanding the sources and uses of your cash can improve your ability to forecast cash and optimise your overall cash management.

  1. Keep on top of accounts receivables bill early and bill often!

Accounts receivable is your business’ primary source of cash, so it’s important to manage it effectively to ensure that the amount and timing of critical cash flows are not compromised.

It’s important to send out invoices promptly and be sure to follow up on overdue bills. Late payments also herald potential service or producer issues, so pay attention to the reasons bills aren’t being paid – is it because invoices are being missed or because those who should be paying them feel they aren’t receiving a product/service worth paying for?

Defining clear payment terms with suppliers or clients from the get-go is just one simple way of ensuring bills are paid on time. If you’re running an accounting platform like Xero, it makes it so much easier to see who has and hasn’t paid and how long they take on average to pay.

  1. Focus on increasing sales and income

If you need more cash, it seems somewhat obvious to go out and attract new customers or clients to sell additional goods or services to. As always though, this is easier said than done.

New customer acquisition is essential to growing your business. However, growing your business also takes time and money. The simplest solution is to focus on increasing sales to existing customers.  Not only is this a cheaper alternative (6 to 7 times cheaper, according to the White House Business Advisory), but by analysing what your customers are buying, why and what they need in addition, you might even enhance your overall business strategy/model along the way.

  1. Developing a temporary cash flow in times of crisis

When it comes to managing cash flow, if you’ve planned ahead you’ll more than likely have a business line of credit or borrowed money to pull from until you get your cash flow back in order. However, on the off chance that you don’t have a source of credit to cover short-term expenses, there are other ways to manage cash flow in the short term.

One way to do so is to negotiate paying vendors at a later date. Many vendors will be understanding and allow you to negotiate a later payment date because, of course, they want to keep you as a customer. But be upfront and stick to the terms of your agreement!

Of course, if we can help you better understand your cash flow position or develop strategies to manage your cash flow, we’d be delighted to chat. You can drop us a note or call Kerry today on 02 6023 1700.

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