5 tips to manage your cash flow

Cash is king—it’s a common saying in the business world. But surprisingly few entrepreneurs take steps to manage their cash flow so they don’t wind up with an empty bank account and nothing to pay the bills.

“One of the main causes of business failure is poor cash flow management,” says Susan Rohac, Vice President, Growth and Transition Capital at BDC. The good news: cash flow management is easy to improve with a few simple steps.

“Getting control over your cash flow helps you prepare for slow periods, plan your financing and have peace of mind,” Rohac says.

Follow these five steps to get a better handle on your cash flow.

1. Check your profitability

First, make sure your business is earning a reasonable profit. Even the greatest cash flow management won’t help if your fundamentals are out of whack.

Analyze each product and service separately to see whether it’s pulling its weight. Make sure your products are appropriately priced, and work to eliminate inefficiencies. Instead of just chasing sales, chase profitable sales.

Mike Whittaker’s company Bonté Foods learned the consequences of poor cash flow management the hard way after facing large cost overruns on two major projects.

The deli meat maker in Dieppe, New Brunswick, a suburb of Moncton, had to act quickly to restore its cash position.

It analyzed its profitability and realized it had to raise prices to better reflect costs. Bonté also unloaded lower-margin product lines and launched an efficiency drive while tightening cash flow management.

The changes had a huge impact, producing higher sales and profit margins. “We learned to watch our cash very carefully,” Whittaker says. “You need to always be ahead of the curve on cash flow management.”

2. Do a cash flow projection

Next, prepare a cash flow projection for the coming year. This is your early warning system for cash flow hiccups. Use an Excel spreadsheet or accounting software to plug in expected monthly cash inflows and outflows, including anticipated big-ticket purchases.

Use the projection to anticipate slow periods and plan in advance what to do about them. “Through the year, check your actual cash position regularly—once a week or month—against your projection to see how you’re doing and deal promptly with any divergences,” says Rohac.

3. Finance big buys instead of draining cash

One of the most common cash flow mistakes is using cash to buy a major long-term asset, instead of getting financing. Even if you feel flush right now, you may suddenly wind up short of cash if you experience a sudden revenue shortfall or rapid growth.

Use your cash flow projection to plan your financing needs ahead of time, not in the midst of a crisis, when bankers may be wary to lend. Rohac also recommends matching the lifespan of a purchase with financing of similar duration.

4. Speed up cash inflows

Getting money into your business more quickly can save you carrying costs on your line of credit. Some tips: send out invoices more quickly, ask customers to pay electronically and charge interest to slow-payers.

5. Raise cash quickly in a crunch

Facing an unexpected cash flow crunch? You can raise cash quickly using various techniques: approach your bank for help; check your inventory and assets to see what you can sell off, even at a discount; ask suppliers or your landlord for extra time to pay bills; or offer your customers a big discount to earn some quick sales.

Top tips to manage small business finance

manage small business financeCashflow management may be one of the main reasons small businesses fail, but budgets and finances are the next two down the list.

Balancing the books isn’t easy, nor is budgeting and forecasting what your ongoing costs will be at any time. One of the big problems businesses run into when they start getting some good money is that lack of forecasting and financial planning can lead to disaster.

“Businesses tend to either overestimate or underestimate,” says Peter Strong, executive director of the Council of Small Businesses of Australia.

“They often make budget decisions based on their emotional decision…rather than the facts.”

Many SME owners didn’t get into business to run their finances so this is an area often left until last.

There are several ways small business finance can be improved – and much of the time it doesn’t involve having to be any better at math.

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Make data-led and informed budgets

As Strong explains, many businesses make financial decisions based on gut feel rather than looking at past data to get a feel for more accurate predictions.

“When businesses look at the next year, they tend to assume a lot of things like ‘oh, rent will only go up by CPI, or wages will be the same’,” he says.

“But have you spoken with the landlord about that? They might think something different. And if you have people leaving, are you going to replace them? Do you need that work to be done?”

Strong says SMEs need to be more realistic about their planning and always keep the worst-case scenario in mind.

Get the big picture

Little Real Estate is Australia’s largest privately owned real estate business with more than 400 employees across the eastern states, with offices in Melbourne, Sydney, Brisbane and the Gold and Sunshine coasts. The business has over 21,000 properties under management.

The company has recently been through a significant financial transformation – especially with the adoption of new reporting technology – and its success is a road map for SMEs looking to get a handle on their money.

Like many businesses, financial information within Little Real Estate was often housed on disparate systems, making it difficult to forecast. Rebecca Kerr, the company’s chief financial officer, says team members were forced to spend hours putting reports together.

“It wasn’t effective, and it ran the risk of data not being accurate,” says Kerr. “So we implemented a new finance system and budgeting tool to assist with the collation of data”.

With weekly operational reports required on properties under management, rental arrears and so on, there were many variables that could negatively impact the company’s finances. Having that data readily accessible better informs financial decisions.

“Previously, we weren’t able to provide that data to the board and the business in a timely manner.” says Kerr. “That was the key driver for us.”

Make financial data available to more people

The future of business is one in which data plays a key role, but democratising that data is just as important. Little Real Estate was able to prepare more accurate budgets by enabling and empowering each division to be accountable for their results.

“The traditional accounting software we used was quite simply unable to deal with our future growth strategy,” says Kerr.

Now, new technology installed by the business has enabled each division to spend less time compiling data – they simply run reports and have it visualised.

This saves the finance division a huge amount of time, and also enables more accurate reporting: decisions are made closer to the source which spends the money.

“We are seeing employees spend less time on compiling data and more time analysing it, doing the reporting and adding value to the business,” says Kerr. Adding a budgeting tool allows quicker access to the financial truth of the business so divisions could make their own informed decisions.

“That has allowed us to get more ownership around the whole budgeting process,” says Kerr.

Given that experience, what does Kerr recommend for other businesses to get a hold of their finances?

“A lot of it is about documenting processes and making sure they’re being done as efficiently as they can.” she says.

It’s important to challenge current processes, and ensure they are not followed just because it is how they have previously been done, Kerr says: any software solution, should then continue to build on these efficiencies.