Managing Cash Flow - the key to surviving in small business.
Managing cash flow can be a challenge, especially in the early years. Our Firm has had the
unfortunate experience of seeing a very profitable business be liquidated because their
cashflow was severely disrupted for three months and they could not pay rent or wages.
Often said: Cash is King. You need to pay attention to your business cashflow. This is not your budget.
If you apply a time frame to a budget it will give a cashflow projection. Looking at your bank account
will tell you if it is working.
Other things you should consider include:
- Control costs. Although you won't have much flexibility with the cost of goods sold, you should continually review this. You can
manage some of the overhead costs associated with advertising, sales and administration.
- Don't spend too much on growing the business too quickly. Many small businesses fail not because business is bad, but because
they try to grow too fast. This can cause finance issues for stock, debtors and creditors.
- Consider invoice factoring. Receivables financing is a viable way to deal with slow collections and generate cash. This is not for
long term finance but may get you over a hump.
- Review your credit terms. If you're not getting a good deal, then shop around. You can generally get concessions on terms if you're
doing a lot of business.
- Set your Terms to encourage your customers to pay early. Get as much deposit upfront as possible and may be provide incentives
to customers who are willing to pay in cash. Be wary about offering discounts on early payments as these directly reduce your
profit and consequent cashflows.
- Do not allow owners to drain the bank for private use. Wages and drawings must be proportional to the profits generated at the
Managing cash flow should be a small business owner's highest priority. Keep in mind that more cash is always better. It is hard to
manage though without a budget.
Small overdrafts and short term finance are also tools in managing cashflows. However be careful these don't become money pits,
continually getting bigger and sucking more cash in repayments and interest. Whether you're repaying a line of credit, credit card
or any other debt, it's best to pay it down to zero at the end of each billing cycle.
If you have this problem – you probably need to talk to us. Call 03 9580 9866!