When it comes to running a small business, cash flow management is king. Effective cash flow management is the difference between running a successful business and, unfortunately, going out of business.

We’ve all heard the saying that ‘cash is king’, but despite the popularity of this phrase cash flow is an area of business that is often neglected. Managing cash flow can be one of the biggest challenges business owners face.

Plan and monitor your cash flow

A good cash flow forecast will help you to monitor when you have money coming in and going out of your business. It can help you identify when you will have extra cash available or are likely to experience shortages and provides warning signs to avoid future financial problems. It is critical that you prepare a cashflow statement.

Prepare a Cash Flow statement

Cash flow statements are indicative of your company’s health. They show that you have a healthy business capable of continuing operation at any given time.

Here are some basic terms and elements of a cash flow statement you’ll need to know to  when creating your cashflow statement.

Cash from operating activities: This is how much money is flowing into your business. If this number is lower than net income or it’s a negative number, this could be a problem.

Cash from investing activities: This should be a negative number. This includes money your business has used to invest in itself and its products. Buying supplies or further developing your product are two examples of this kind of activity.

Cash from financing activities: This area demonstrates how much money your company is spending to pay off certain obligations. This can include things like dividends.

Net change in cash: This is how much cash your company gains or loses based on the investing and financing activities.

Net cash: Net cash can be highlighted as beginning and ending balance. The ending balance is determined by applying the net change in cash to the beginning balance. The ending balance shows how much cash you have on hand.

Tips to improve your small business cashflow

  1. Stay on top of your books

Even if accounting isn’t your idea of a good time, any smart business owner will tell you the importance of understanding your accounts when it comes to ensuring consistent cash flow. If you’d prefer not to get bogged down in pen and paper, you can always opt for cloud-based accounting software to digitally manage your bookkeeping and automate some of the more onerous data entry.

  1. Implement effective credit control

Late payment of invoices is always a problem for small businesses. It can put a real dent in your cash flow. The good news is that, while you are always going to need to implement some form of collections, there are steps you can take to keep time spent on those collections to a minimum.

Do your due diligence and run a business credit check on potential customers to spot any payment-based red flags before onboarding them. Have clear and straightforward payment terms that set out when you expect to be paid and include all the payment details your customers need to make a timely payment.

As with accounting, there is cloud-based credit control software that can help you with your collections efforts and automates a lot of the more time-consuming parts of the process.

  1. Don’t wait to send invoices.

Again, a key reason cash flow matters is that it distinguishes between invoices you’ve sent and invoices that have actually been paid. That $10,000 invoice means little if you don’t yet have that money on hand to cover your expenses. That’s why you shouldn’t hesitate to send invoices.

You may want to shift from a monthly invoicing model to one in which you send invoices every time you complete a certain amount of work. For example, if your small business is an advertising agency, send your invoice not on Nov. 30, but whenever you complete a preset number of campaigns, ad spends or other initiatives that month.

  1. Invest in Software as a Service (SaaS)

Rather than buying new software, you can usually licence it. The benefit of using SaaS is that the cost is spread out over the lifetime of the contract, rather than an upfront payment. As a business owner, you should take advantage of technological advances and artificial intelligence-enabled solutions, like new apps and software updates. These can streamline your business processes and increase efficiency.

The right technology and the right business strategies can make a big difference for your company. They allow you to spend less time worrying about cash flow and more time running your business. If you don’t feel confident in overseeing your cash inflow and outflow, you can always hire an accountant or bookkeeper to do it for you. Regardless of who manages your cash flow, it needs to be done.

  1. Cut where you can

In more volatile economic climates, you might find you need to cut back by streamlining your business. This is where staying on top of your accounts is vital. With the proper reporting, you can identify product lines or services that aren’t performing and either pivot or cut them to help minimise your overheads.

For instance, switching to Zero Cost EFTPOS means you keep the full amount of every sale and, if you have a monthly turnover of over $10K in credit card transactions on each terminal, you don’t have to pay for the EFTPOS rental, further cutting your expenses.

  1. Lease your equipment instead of buying it.

Even though it’s usually cheaper over the long term, buying new equipment and updating outdated equipment can be costly in the short term (not to mention time-consuming). Leasing your equipment instead can lessen your short-term financial burden. You won’t have to upgrade or try to sell outdated equipment that you’ve purchased, and equipment leases often qualify for tax credits that lower your tax burden. As such, you’ll have less cash leaving your bank in large lump sums, and maintain a more regular cash flow.

  1. Outsource certain tasks

If you need specialist staff but don’t want to jeopardise your cash flow by going through the hiring process and onboarding a new staff member, you can always outsource the position. There are plenty of companies that specialise in acting as specific departments, such as accounting or collections, for companies that don’t want the expense of hiring new staff.

  1. Have a line of credit handy

Having lines of credit available that you’re not using, either with your suppliers or with a financial institution, is an excellent way to shoring up your cash flow and staying liquid during challenging economic times. The best time to solve a cash flow problem is before it happens. If your business is running smoothly or is in the beginning stages of production, now is the time to borrow money. By opening a business line of credit when your numbers are good, you can avoid the risk of rejection later.

This will also provide you with resources to fall back on should you experience any growing pains associated with starting a business. Arora said that a business line of credit can be a lifeline for small businesses, particularly those impacted by seasonality

  1. Don’t be afraid to ask for a deposit

Asking for a deposit can allow you to get the costs of the work, be that in staffing, goods, services, or materials, covered upfront, with the profit for the work being paid on completion. Having the option to take a deposit means you’re not out of pocket for the basic expenses of the work while you’re doing it.

  1. Examine your own lines of credit

Offering lines of credit to your customers is an excellent way to drum up new business and potentially encourage customers to place larger orders because they don’t have to pay for it all upfront. However, if you have customers who persistently pay their invoices late, you could consider cutting the amount of credit you’re offering them or increasing the amount of interest you’re charging.

  1. Restructure your payments and collections.

Depending on whom you’re working with, you may be able to put off some payments to your vendors until your business is financially healthy. Do your best to maintain a healthy relationship and avoid late fees.

Restructure your payments to your vendors to create a more balanced income for your business. By doing this, you can turn your vendors into lenders. If you are unable to restructure payment dates, consider restructuring payment costs. You can do this by meeting with new vendors that can potentially provide inventory and supplies at a better cost. Arora said that even if you are not looking to replace your current vendors, you can use the information from competitors as leverage to get better pricing.

If you need assistance with cashflow planning, we are here to help. Please contact our office to discuss how you can better manage your small business cashflow.


General Advice Warning

The material on this page and on this website has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained on this page and on this website is General Advice and does not take into account any person’s particular investment objectives, financial situation and particular needs.

Before making an investment decision based on this advice you should consider, with or without the assistance of a securities adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances. In addition, the examples provided on this page and on this website are for illustrative purposes only.

Although every effort has been made to verify the accuracy of the information contained on this page and on this website, Camden Professionals, its officers, representatives, employees, and agents disclaim all liability [except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this website or any loss or damage suffered by any person directly or indirectly through relying on this information.