There is no doubt that cash flow – or lack thereof - is the number one reason why many businesses fail. So, it stands to reason that it’s one of the most important aspects of running a business to get right!
Over the many years that Trinity Advisory has been helping to scale businesses, the team has seen almost every mistake in the book when it comes to administering cash flow. Here are our tips on how to better manage cash flow in your business.
First things first. You need to keep business and pleasure separate. You can’t get a real understanding of exactly how much cash your business is generating if you take from the same pool of money allocated to living.
Moreover, if you don’t separate your business and personal accounts then you can’t show that you are paying yourself a genuine wage, which can be problematic if you need to apply for credit.
So set up separate accounts for your business and personal finances.
Understanding your break-even point—the juncture where revenues match expenses—offers invaluable insight into your business's financial health. Regularly assessing this threshold provides clarity on the efficiencies of your operation, aiding in informed decision-making and budget forecasting.
While knowing your break-even point won’t directly affect your cash flow, it will help you to put strategies in place to reach your breakeven point sooner. To do this you need to have solid data on your revenue and expenses so that you can develop a breakeven analysis.
Stop using excel to manage your financial data and subscribe to a reliable accounting software. If you’re not confident with numbers, engage with an accountant who uses adequate accounting software for your needs.
Trinity Advisory is a Xero Platinum Partner and so over the years the team have successfully transitioned many small businesses over to this platform. Systems like Xero can make it simpler for business owners to have visibility of their cash flow as well as invoicing, cost of goods and payroll.
Also, good data exported from your accounting system will help make cash flow forecasting easier. Knowing this will allow you to plan for the good times and the bad.
If possible, try to get into the habit of sending out your invoices daily. The sooner they are sent, the sooner they will be paid and the less amount of time you’ll be covering your costs. Consider shortening your payment terms or even offering a small discount for early payment.
Nowadays with so much technology at our fingertips, there is really no reason why you can’t accept payments online. If you don’t accept payment by credit card, there are other online methods such as EFTPOS and PayPal. Providing multiple online options for customers to pay means that it will you’ll get paid faster.
While you want to get paid faster, you should negotiate with your suppliers to obtain maximum flexibility to stretch out your payment date.
Managing stock levels is an art form. You want to buy stock in bulk to keep costs down, but you don’t want to hold too much stock because it costs you money to store.
Good quality accounting systems like Xero and associated apps can help you to monitor your stock levels on a regular basis, so that you only purchase what you need for the foreseeable future.
It’s obvious but needs to be said. Effective cash flow management also means keeping your costs to a minimum. Look for ways to reduce or control your spend, for example:
Lastly and probably most challenging, start building up your cash reserves. This will allow you to manage unexpected costs more effectively and will give you far more flexibility to make strategic decisions longer term such as investing in new opportunities.
A Business Advisor or Accountant can help you identify any leakages in your revenue stream and then work with you to provide strategies to help rectify the issues.
Trinity Advisory is not just an accounting firm, we specialise in Business Accounting, Advisory and Coaching for SME's. If you’re
a small business owner who needs help managing your cash flow, controlling your costs, scaling your business and growing your profits,
then get in contact today to learn more about
our business accounting, advisory and coaching services.