If you're running a business, it's crucial to have healthy cash flow. Read on for a few tips on how to ensure that you stay cash flow positive.
What is cash flow?
Cash flow is the amount of money coming into a business compared to the amount going out over a specific period of time. For example, weekly, monthly or quarterly.
If your business has positive cash flow (actual or forecast), more money is flowing in than out. On the other hand, if your business has negative cash flow, more money is flowing out. This isn't sustainable in the long term as you won't have enough to meet your financial obligations.
Neutral cash flow is where both incoming revenue and outgoing expenses are even. This is obviously better than negative cash flow, but in a healthy business being cash flow positive is the objective.
A cash flow statement shows how cash is impacted by changes in balance sheet accounts and income. It is one of the three main financial statements, along with the balance sheet and income statement. The information on the statement will be broken down into investing, financing, and operating cash flow. Operating cash flow is the money generated from your company's normal business operations.
Why cash flow is crucial
A famous quote by Virgin entrepreneur Sir Richard Branson perfectly highlights the importance of cash flow: "never take your eyes off the cash flow because it's the lifeblood of business".
Without healthy (positive) cash flow, you won't:
- be able to pay all your business expenses when they're due.
- have the money you need to invest in your business to help it to survive and thrive.
Cash flow survival tips
Poor cash flow is the leading cause of business failure in Australia. Here are some cash flow survival tips to prevent your business from becoming a statistic.
Tip 1: Forecast and monitor your cash flow
There's an old saying that people don't plan to fail, they fail to plan. It certainly applies in the business context as well. Get into the habit of regularly doing realistic cash flow forecasts, and then monitoring your actual cash flow to identify any discrepancies.
This will allow you to identify any potential shortfalls, and to put strategies in place to help prevent any major cash flow issues.
Tip 2: Use invoice financing
If you offer your customers credit payment terms, then invoice financing can help you access cash from your accounts receivable ledger. With invoice finance, you are extended a line of credit based on a percentage of the value of your customers' unpaid invoices. It provides flexibility as you can drawdown funds as you need them. Best of all, the amount of your business finance can grow as the value of your invoice ledger grows.
Tip 3: Send your invoices straight away
Don't delay sending your invoices. Every day you delay, you're either delaying payment from your customers or delaying building your account receivables ledger (which can help you access a higher level of funds if you're using invoice financing).
If you do monthly invoicing, consider doing it weekly instead. If you do weekly invoicing, consider doing it daily.
Tip 4: Monitor your stock levels
Many businesses tie up their cash in excess stock. Try not to have more stock on hand than you can sell quickly. If you do, you're tying up cash that could be used elsewhere. You should also try to avoid slow-moving stock as much as possible.
Tip 5: Lease your equipment instead of buying it
This one will need a discussion with your accountant as it may not be right for every business. However, you can avoid having large upfront costs for your assets when you lease equipment. Instead, you can pay smaller lease payments over time. Leasing your equipment also allows you to upgrade it more easily.
Tip 6: Evaluate all your expenses
Don't focus all your energies on trying to generate revenue. Be mindful of minimising your costs as well. Evaluate all of your business expenses. Eliminate or reduce any non-essential expenses, especially if you have cash flow issues.
Tip 7: Negotiate with your creditors
Negotiate more favourable payment terms with your creditors, if you can. Ideally, their payment terms should align with your cash flow. You might also be able to negotiate discounts for faster settlement.
While your business may be profitable, if you don't effectively manage your business finances or have good cash flow management practices, you might find it very difficult to run your business smoothly. At Waddle, we help businesses access the cash they need with our invoice finance solution. If you'd like to learn more, please get in touch.