10 ways to stay on top of your cash flow

Reading time: 4 mins Read time

Cash flow is one of the biggest issues facing start-ups. Recent research reveals Australian small businesses are chasing $76 billion in unpaid customer bills and according to the Australian Securities and Investment Commission, poor cash flow was the key factor in half of all tech firm failures in 2016.

So how can you manage your cash flow more effectively? Here’re ten ways you can stay ahead and in control of your finances:

1. Set up a credit control system

Your credit control system needn’t be complicated – it’s really all about getting paid as soon as possible – but it’s essential to put some procedures in place. The basics include setting clear credit limits and payment terms for your customers, sending out invoices promptly, and firmly chasing all debts when due. To help speed up the payment process, ensure you list the correct payment details on sales invoices and offer multiple payment methods. You should also stay on top of customer payments and be quick to stop offering credit to bad payers.

2. Forecast sales

Sales forecasting is all about predicting what’s ahead so you can prepare for cash flow peaks and troughs. You can start forecasting as soon as you have a month’s sales behind you. To work out future demand, use your market knowledge. Think about your pricing, the level of competition, the state of the economy, and so on. Remember, it’s better to be cautious than optimistic – that way, you’ll hopefully avoid nasty surprises.

3. Cut unnecessary costs and spend

When it comes to preserving cash flow, think lean and mean. Scrutinise every item you buy, know exactly where your cash is going, and always get value for money. Work out what you really need, too – those office pot plants might look nice but they won’t grow your business.

4. Negotiate good terms with suppliers

It’s always worth investigating to see if you can extend payment terms with suppliers. If you can settle your bill in 60 days or even 90 rather than 30, you can hold on to your money for longer, which helps regulate your cash flow. If you’re thinking about making a big order, don’t miss the chance to negotiate. Could you set up a regular payment plan for example rather than paying off outstanding amounts in one go?

5. Manage stock intelligently

Monitoring stock closely and only ordering what you need is essential to avoid unnecessarily outlaying cash. Work out what sells quickly and profitably in order to keep income steady and make sure you’re not tying up funds in slow moving items. If you’re looking for a quick cash injection, try selling off old or outdated stock at a cheaper price.

6. Don’t tie up cash

If you have orders coming in, it’s always tempting to purchase the latest equipment or ‘nice to have’ items. Think wisely before splurging on excessive purchases and try to hold on to liquid cash. If you’re buying assets like computers, ask if the supplier will offer a finance deal over a year or consider taking out an overdraft.

7. Stay on good terms with lenders

It pays to stay on the right side of the bank. Always keep your books up to date so you can show your figures, just in case you need to borrow. If you’re struggling with repayments, talk to your lender rather than burying your head in the sand.

8. Try using invoice discounting

This is where a third party ‘buys’ your invoice and releases cash based on its value. It won’t suit every business model but it’s often a good option if you’re growing. Some lenders will give you up to 90% of the invoice amount, but fees can be high so always shop around.

9. Spot the warning signs

A drop in turnover, customers taking longer to pay, incurring late penalties from the ATO, and being forced to settle supplier invoices later than usual are all classic signs of poor cash flow. Don’t ignore the warnings. It’s generally easier to work out ways to increase working capital before you’ve built up a lot of debt.

10. Be realistic about your business

Sometimes you need to take a step back to see things clearly. If you’re always struggling and your cash flow statement is poor, ask yourself why. Are your sales too low? Are your products poorly priced? Can you chase payment more quickly? Be level-headed about your venture and its future – if you’re not making a profit, you might need to rethink things.

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