The term ‘cash flow’ refers to the money that goes in and out of your business on a day-to-day basis.
A healthy, positive cash flow is very important when running a business. It enables you to pay your accounts, wages and taxes on time, and to avoid extra borrowing or resorting to high-interest credit cards.
If you are finding that you regularly run out of funds in your business, then you should look at how you can improve your cash flow.
Here’s are some tips.
Keep bank reconciliations up-to-date
Doing regular bank reconciliations is a good business practice as it gives you a clear picture of the money your business has in the bank at any given time. This is far better than relying on guesswork or assumptions.
Improve debtor management
To do this you could tighten up your payment terms, and/or offer incentives (e.g. discounts) to customers for paying early or by the due date.
It’s also important to not give credit too readily to customers – at least not without thorough background checks.
Analyse your expenses
Spend some time looking at your expenses with an eye to reducing waste or unnecessary expenditure. For example – do you have subscriptions to apps you rarely use? Are you purchasing items singly when you could get them cheaper in bulk?
Another thing to consider is looking for better deals on services, such as power and insurance.
Stagger payments where you can
Some people like to pay all their bills at once before they are due because they don’t want them hanging over their heads. However, this can lead to cash shortfalls.
If you do this in your business, see where you could stagger payments to even up some of the bumps in your cash flow.
Improve inventory management
If your business maintains an inventory, check if you have too much tied up in slow-moving products. If so, could you sell some of these off at a discount? Or return them to the supplier for a refund?
You might also need to alter the way you reorder products to avoid excess or inadequate stock levels.
Create separate ‘purpose’ bank accounts
Putting a set amount of cash regularly (e.g. weekly) into various ‘pockets’ helps you avoid sudden bill shock. For example, you could set up some new bank accounts for future payments of GST or PAYG.
If you’re not sure how much to save toward these items, your bookkeeper should be able to help you.
Develop safety nets
It’s a good idea to keep some cash reserves in case of unexpected expenses. There’s no set formula for this but it should ideally be equal to at least two months’ worth of expenses, preferably more.
Liquidate unnecessary assets
If you have an asset you hardly use, consider selling it to inject some extra cash into the business.
You might also want to consider lease arrangements for assets rather than outright buying, as this could even out the payments you need to make.
Create a cash flow forecast
Since it’s impossible to totally predict the future, it can be easy to dismiss forecasts as being too difficult. However, using some of these methods should make it easier for you to get a reasonable picture of your upcoming income and expenses and to gain better control of your cash flow.
How a professional bookkeeping service can help!
Since keeping constant tabs on your cash flow can be a time-consuming and onerous task, consider partnering with a professional bookkeeping firm to do it for you. Contact us to find out how we can help.