Good cashflow management is essential for your small business’ survival and growth. You may have heard this before, but this message is now more important than ever. Here are my top cashflow management tips for SME business owners.
A cashflow forecast is an estimate of the amount of money expected to flow in and out of the business, usually over the course of a year. The forecast can be prepared on a weekly or monthly basis, and it is essential for business owners to regularly monitor and update this. If you have not yet created one, a simple excel template can be used.
Cashflow vs Profit
Your business can be profitable and still have cashflow issues. This is because profit is recorded when a sale is made, but the cash may not be received until sometime later. Cash liquidity is your business’s lifeblood – you may be generating a profit but without cashflow, it will not survive long!
Working capital is essential in managing your business cashflow – this is the capital needed for day-to-day business operations and plays an essential role in managing your business cashflow. Working capital is dynamic and needs to be monitored closely for daily decision making in your business, particularly in areas such as granting credit to customers, debtor collection, efficient stock control and securing favourable payment terms with suppliers.
Three essential financial ratios that businesses must track to see the warning signs of looming business problems include Liquidity ratios, Profitability ratios, and Operating ratios. Monitoring these ratios, you can spot trends within your business and benchmark how you are tracking against competitors.
Monitor inventory levels
Holding too much inventory can tie up cash and increase storage and insurance costs. If your business is struggling with cashflow issues, consider modifying the quantity and timing of inventory purchases to coincide with higher cashflow periods.
Manage overdue debtors
Follow up on all overdue customer debtors and ensure that your credit policies are reasonable for cash to flow in on time. It may even be wise to introduce new payment options so that customers can pay their debts more easily, such as introducing a mobile EFTPOS machine or phone payment capabilities. If you have many overdue debtors and are lacking the time and resources to follow them up, consider outsourcing this process to a debt collection agency.
Cashflow issues may be the result of the pricing of your products and services. Review the pricing to determine if they are in line with market conditions and competitors’ pricing. If you are undercharging products/services, increasing the price can help you take greater control of business cashflow.
Manage overhead expenses
Examine each overhead expense to determine where there may be overspending and reduce these costs. The message can be communicated to all staff who can help reduce these expenses. You may also negotiate a discount with suppliers for early payment or agree on a longer payment plan.
Debtor terms and conditions
It is important to have debtor terms and conditions in writing and agreed with the client. Without it, clients may not pay within the required time frame, causing cashflow strain. Debtor terms and conditions need to include the length of payment time, as well as interest to be charged on overdue payments.
Sell unnecessary assets
Offloading unused assets helps reduce storage and insurance costs and bring more cash into your business. For more valuable assets, consider leasing or other financing options to spread the cash outflow over a longer time.
Maintaining and forecasting cashflow is essential for business survival and growth. If your business is experiencing cashflow issues, these strategies may be useful in improving your business cashflow.
Carmelina Fiorentino, Senior Manager, Business Foundations