Improving cash flow in a business
Cash flow is what drives your business and keeps you awake (or preferably, asleep) at night. Put simply, cash flow is the lifeblood of your business. It’s also one of the most important measures of success of your business. Your business is like the game of monopoly – you can’t pass “go” without cash flow.
We cannot overestimate how important it is to keep close tabs on your business’ cash flow. For business owners, this is done through the use of two documents; your budget, and your cash flow forecast.
Your budget is about estimating how cash will come and go from your business over the next 12 months, whereas your cash flow forecast is about estimating the timing of your cash’s movements, in smaller monthly intervals, including your GST and Tax Obligations.
Let’s talk budget!
No matter your business type, size, or location, it’s essential to have a 12-month budget that you work to. Your budget is an itemised summary of your income and expenses for the coming year. It is typically created as a spreadsheet, and lets you understand at a glance how much money is coming in and going out. Once you have a budget, you can prioritise your spending with confidence.
Cash flow forecasting
Why is cash flow forecasting important?
The biggest up-side of a cash flow forecast is that it allows you to make a plan about whether your business will need to borrow to cover the cash droughts, how much ideally you need to borrow, when to do it, and how you’ll repay the loan, including the timeframe for repayment.
In our experience, getting cash flow management wrong is the most significant cause of severe pain for business owners, yet it is relatively simple to get right using two documents – your budget, and your cash flow forecast.
Cash flow forecasting 101
Although a cash flow forecast may sound like an intimidating document to prepare, it doesn’t have to be. Think of it as a picture of the next 12 months. Showing any cash shortfalls you might have at certain periods, due to big events. These events should be linked to planned changes or times of the year when you know you are quieter. Plan for that and look at what you need to be doing now to make sure that doesn’t become an issue.
The bottom line is that your business's cash flow needs to be managed effectively for your business to be successful.
How to fund your cash flow
Always remember that when you issue an invoice, it becomes outstanding cash that’s owed to you. You’ve provided the service and now the money is owed. Seems simple right? But, if we had to put our finger on the number one thing that our customers tell us that keeps them awake at night, it is lack of cash flow. Or, more specifically, a lack of visibility about how much cash they need for their business in the coming 90 days.
Customers pay late, pay only part of an invoice, or in some cases argue and don’t pay at all. Because of this, sometimes it’s necessary to consider using tools that can help you plan your business's short-term cash flow and if necessary, borrow money quickly to ride out those cash flow shortage periods.
Remember, when your customers pay late you are effectively taking on the role of a Bank for them.
The good news is that there are a lot of proactive tools that you can use around your 90-day short-term cash flow plan, to actually get paid. By making smart use of technology, businesses in New Zealand can now get extremely fast “cash flow funding”, on more flexible terms than traditional banks.
What are the benefits of having good 90-day cash flow control?
Well, business owners who we work with, who really understand the ebbs and flows of their money tend to look like this:
They know where every dollar is coming from, and where every dollar is going.
They know who they have to pay (accounts payable), and who is going to pay them (accounts receivable), in the next 90 days. They can address non-payment quicker as they have their finger on the pulse.
Prepared for the worst
Even the best businesses have cash flow lulls - perhaps they’re caused by seasonal factors, maybe by a big payment going out. Regardless of what causes them, successful business owners are always prepared for them.
In short, there are an endless number of reasons why cash flow can dry up periodically, but owners who see those periods coming, have the advantage of being able to ramp up sales in those periods or tighten up on their expenses.
Planning your cash flow for the long term
Having a long-term cash flow plan means you’ve got all your ducks in a row now and in the future.
We recommend asking yourself questions that get you looking ahead to make sure your business can progress in the right direction.
Is your relationship with your bank working for you?
We recommend finding a bank and sticking to it – don’t chop and change too much. But check if your loans are set up at competitive market rates. Be open and honest with your Bank and share your Budget and Forecast documents with them so they get a better understanding of you and your business.
Do you get paid when you should?
Are you paying out expenses before you get paid by your customer payments? If so, you need to stop and make some (easy) changes to your billing processes.
Can you dangle a carrot in front of your customers to get them to pay early, or at least on time?
Early payment incentives do work and can be great tools to make sure your long-term cash flow is as stable as possible.
Are you scared to talk about money?
Too often, we see customers who talk with passion about their business but they’re timid in talking about money, and payments, with customers.
If that’s you, we strongly encourage you to get over this reluctance to talk about money. Your customers will appreciate simple, honest conversations about your payment policies, and it will help you get paid regularly and on time.
Do you have a plan for late payments?
The way you address late payments and follow up on them affects your long-term cash flow management significantly. Late payments are impossible to avoid. But when you’re organised and straight-up with your customers about when they expect to be able to pay you, the late payment “punches” become much easier to roll with.
Structure invoicing so it works for you
When you structure your invoicing to work for you, you’re removing risks to your business.
Do you get paid by your customers on time, most of the time? If not, why not? There could be some really simple changes that you could make to your invoicing processes to get better results.
Requesting deposits from your customers for products or services provided is a great way to minimise cash flow lulls, especially for big payments.
Progress payments not only provide a reliable forecast of when the cash should enter your accounts, but they also ease the payment pressure for your customer as they are not lumped with one big bill at one time.
Review your supplier's payment T’s & C’s
Are you putting too much financial pressure on yourself and your business by having big gaps between money needing to go out and money coming in?
If you answered yes then it might be a good time to look at the terms and conditions you have with your suppliers – if your suppliers are expecting payment from you at certain times of the month, are you putting pressure on yourself by having big gaps between when you have to pay them and when you receive money from your customers?
Every business is different, and yours will have invoicing structures that work for it, based on the terms and conditions you set for your customers, and the ones you agree to from your suppliers.
Avoid putting pressure on your own cash flow. You’re not a bank for your suppliers and customers!
We’ve got a handy guide on managing your debtors more effectively, you can read it here.
We get it – not many of the points on this page are likely to get your heart racing with excitement! But long-term cash flow management processes are some of the fundamentals of running your business successfully, and these processes don’t need to be super complicated.
One of our savvy, approachable business advisors can give you sound advice to make your path clearer and bring your goals closer. They’re fantastic at translating accounting-speak into straight-up, meaningful advice. Get in touch today.
Read our other business growth guides
Many highly ambitious business owners and entrepreneurs have dreams of taking their businesses to the big time. But scaling a business is so much more than adding headcount or indeed customers. In reality, scaling needs to be part of a careful business strategy in order to retain the magic of the small business and unlock the benefits of a large business.
Managing a business can be overwhelming! More often than not you’ll be wearing multiple hats throughout each day as you flit between being a people manager, managing the businesses financials, forecasting, strategically advertising your products and/or services, researching new technologies along with a multitude of other tasks required daily!
With more than half a million small business owners in New Zealand, there’s a breadth of backgrounds, cultures and approaches that make up our community. But while small businesses really do take all sorts, we’ve been able to observe the common traits that all successful owners appear to have. In this article, we’ll cover what some of these are. The good news? All of these traits can be worked on and developed with a bit of focus and the right support.
Okay, it may sound like a silly question. Of course you know your business! Who’s closer to your day to day operations than you? And that’s fair enough. But when small business owners are doing everything, there’s going to be elements of the business that get more attention than others. It’s only reasonable that providing your service to your customers is priority number one. Even well-established small businesses turning over reasonable revenue can lose sight of the detail around the financials.
Ever competed in a race where you weren’t told where the finish line was? Tried your hand at baking without a recipe book? How about leaving for holiday without packing your bags? If these all sound ridiculous to you, then let us draw the comparison with a business that doesn’t make plans. Making plans and understanding parameters is so important for business success, but many fledgling businesses have barely planned tomorrow let alone the long term.
It is very normal for business owners to be entrenched in the daily goings on of their businesses. With varying to do lists and high priority tasks requiring their daily attention, it can be hard to take the time to stop and look at the big picture. And that’s just the business part, let alone our busy, and somewhat chaotic, personal lives.
However, it is vital as a business owner or business manager to periodically pull your head out of the trenches and take the time to sit back and review your business as a whole, to ensure you are on track to success.