10 Hot Tips to Manage Cash Flow and Credit

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With today’s financial climate fluctuating almost daily, it’s important to stay on top of your businesses cash flow. To ensure best financial health practices, Mead Partners have put together 10 points for keeping your business in the best fiscal shape possible.

1.  Profit vs. Cash flow

It’s a common misconception that success in business is all about profit. The true success of a business comes when you manage the money coming into the business and balance it against the money going out so that there is always sufficient cash to cover what it owes.

Failure to do so will reduce even the most successful business to its knees.

2.  Cash Flow forecasts – “Plan ahead”

A cash-flow forecast is a key diagnostic tool for the health of your business. Small business owners often shy away from putting together a forecast because they find it hard to gauge the affect different factors will have on cash-flow events like the introduction of a new product line, marketing venture or extra staff member.

Three tips for putting together a solid cash-flow forecast:

• Keep it simple: Focus first on the items that affect your cash-flow most heavily and add extras to the forecast if required.
• Standardise: Ensure procedures for collecting and reporting cash-flow data are consistent across the business.
• Measure your accuracy: Set the level of variance from your cash-flow targets you are prepared to accept, and see how close you get each month. Where targets are missed, investigate the reasons and consider if changes are needed for next month’s forecast.

Indeed, Mead Partners can provide a more detailed analysis of your business cash flow. Find out more about our Biz Impact product and how we can guarantee it will increase your bottom line.

3.  Bigger does not mean Better

Cash-flow management may become imperative during economic downtimes, but periods of rapid growth can present equally difficult cash-flow challenges.

Many businesses go broke by expanding too fast. They don’t understand how to balance growth with things like capital investment as their company grows and they over expand.

Talking to your bank can help you get through the cash-flow squeeze that often precedes a profit boost, this is where your cash flow forecasts will become extremely valuable as you will be able to plan accordingly.

4.  Debtor & Creditor Management

Chasing up debtors is a particular management problem for many businesses. Maintaining credit terms is essential for cash flow management as it is ensuring that you have the ability to collect the debtor’s funds in time to pay your suppliers.

Debtors:

• Constantly monitor the debtors ledger for slow payers
• When chasing slow payers, make sure you get a firm commitment date for payment
• Don’t feel bad about chasing customers for payments, you have provided a service and now they must provide payment.

Creditors:

• Try and negotiate creditor terms that are similar to your debtor terms to ensure cash inflows occur when outflows do
• Don’t ignore creditor’s calls, they will be less likely to grant additional time to pay
• Don’t fall into the trap of COD for creditors but then have terms for debtors – it just won’t work.

5.  Stop a Bad Debt before it is too late.

In these times it is important to stay on top of the customers that you extend credit terms to. Ensure that you have up to date credit checks on all customers and make sure you look out for some of the warning signs of an approaching bad debt:

• Your calls are not being returned
• Promises to pay not being honored or payments being returned
• Excuses and complaints regarding supplies that appear to have no basis
• Receiving credit reference calls from competitors while the customer still has money owing

6.  Reliance on particular customers

It’s great to win a big contract, but too often businesses devote so much time and energy to servicing that one customer that they fail to develop new business.  Don’t fall into the trap of relying on one or two major customers, the impact of losing a major customer can be devastating over night.

7.  Manage Statutory Payments

When Cash flow is tight statutory payments (BAS, Superannuation, Income Tax etc) are the ones that usually get left to last. To cater to this, the ATO offers fairly flexible payment terms on the BASs and Income Tax so long as  future BASs/Tax Returns are lodged and paid on time. However, directors are personally liable for most statutory payments and government penalties are significant when it comes to unpaid super and tax so it is important to make sure that statutory payments are kept under control.

8.  Stock Management

When was the last time you reviewed your stock turnover in days?  Stock is cash sitting on the ground. If it takes 45 days to sell that stock and another 45 days for the customer to pay then you are 90 days behind.  This is a fine line and difficult to control but in times that cash flow is tight this might be crucial to keeping costs at a manageable level.

9.  Excess Plant & Equipment

Do you have plant idle and can it be turned into cash quickly? A quick way of freeing up some cash flow is selling excess plant and equipment. Not only will you receive the cash from the sale, if the equipment is under finance you will also save the monthly repayments going forward. Some things to consider when selling plant and equipment are:

• Is the asset under finance? If so, the financier will have to be paid out so check with your accountant how much is owed otherwise you might end up having to pay the financer more that what the asset was sold for!

• While in the short term a sale of equipment will generate cash, don’t forget that in the long term tax will have to be paid on any profit on that sale.

• While an asset may be underutilized now, there is no use selling it if you’re tendering for a new customer and will need it again in 6 months time. Perhaps it can be rented out in the short term.

1.  Good Management

Good management is the key to survive in the bad times and will make your business even stronger in the good times. Sometimes this means making decisions that you would rather not make such as letting staff members go, and sometimes it means listening to advice or news that you would rather not hear. In the long run these things are necessary in order to keep the business going and if these decisions are made and advice listened to, the good times will greatly outweigh the bad.

Get in contact with Mead Partners today to find out how we can help your business sustain its cash flow.

DISCLAIMER: The above information is general in nature, and must be tailored to your personal circumstances. The information is provided as a guide only.