How to manage your cash flow

Cash flow refers to the ebb and flow of money coming into your business from sales, and going out to pay wages, bills and other expenses.

At the basic level, cash flow is important because to stay in business you need to have more money coming in than going out. Having a healthy cash flow also means you can build up working capital so you can invest in and grow your business.

There are a few questions you can ask to get a gauge on whether you have cash flow problems or are at risk of having cash flow problems in the future.

• Do you ever go into overdraft by mistake?
• Do you sometimes struggle to meet business overheads and wages during slow periods or seasonal downturns?
• Have you ever traded too strongly (done too much business) and had to arrange special funding arrangements to meet your commitments?
• Have you ever had to arrange an overdraft to meet an unexpected tax bill?
• These and similar issues can indicate cash flow problems may be putting your business at risk. 

Some of the main reasons businesses have cash flow issues:

• Forgetting about taxes (and not putting money aside to pay your taxes when they’re due)
• Taking too much out of the business in personal drawings, particularly in leaner periods
• Making purchases at the wrong time, e.g. buying major capital items during lean cash flow months – a better option might be leasing rather than purchasing outright
• Over-trading – it's possible for your business to fail from doing too much business and getting overstretched. For example, if you sell $20,000 of stock for $40,000, you may not get paid for 60 days. But you still have to re-order the $20,000 of stock as well as pay rent, wages and other expenses during that period. And if you can’t, someone you owe money could force you into receivership.

Cash flow management is all about managing the gap between when the money comes in and when your bills are due. The key is anticipating when you may have challenges and taking timely steps to manage the situation – rather than simply reacting when it does happen. Here are some tips to help.

A cash flow forecast is the most important tool in cash flow management and the first place to start. It allows you to project how much cash will be coming into your business and how much will be going out at different times, so you can identify where you may have cash shortages.

It’s not complicated. A cash flow forecast can be as simple as a table or spreadsheet where you plug in your incomings and outgoings. 

Most businesses experience some cash flow difficulties as they develop. What matters is how you handle it.

If you identify a shortfall, don’t panic – forecasting means you can take action to address it before it becomes a problem. This could include taking out or extending an overdraft, chasing up late payers, taking out a loan, or holding a sale to clear stock and generate revenue. 

It’s tempting to spend your surplus on a holiday or a new car. After all, you’ve worked hard to build your business. But consider putting aside reserves. For example, is your business likely to face lean times ahead?

Cash reserves in an interest-earning savings account or term deposit may be helpful to tide you over when business is slow so you can pay wages, overheads, and running expenses – especially if your product or service is seasonal. 

Alternatively, it might be time to purchase new equipment or invest in new marketing initiatives that could grow your business.

To avoid lengthy periods when your business goes without cash, you need to find ways of shortening your cash cycles – in other words, getting paid faster. 

Technology solutions like ANZ FastPay^— can help you spend less time chasing invoices and get paid on the spot. It’s a mobile payment solution that lets you accept payments on the go anywhere, anytime – and you get access to your takings the next business day.

• Do it early – don’t wait for the end of the month
• Change your payment terms – many businesses ask for ‘payment by 20th of next month' but there’s absolutely no reason you can’t ask for payment earlier – or even on receipt of the invoice
• Encourage early payment – for example, you could offer a small discount if customers pay within five or 10 days.

Increasing your prices is one way to get more cash coming in. It can be scary, but only if you assume that your target market is price sensitive or your goal is to win on price (which can be a precarious strategy, especially for small businesses). 

Do market research to test the tolerance of your market to price and the alternatives to your product or service. Price is often not the main consideration – competing on quality can be a better, more sustainable strategy.

If you’re having trouble paying your bills, don’t avoid your creditors – whether it’s your suppliers, your bank, Inland Revenue, or others.

Be proactive. Be upfront and work with them to figure out a solution that both parties can live with. In most cases they’ll do what they can to help you, just as you would with one of your customers.

Here are some examples where technology can be a great way to reduce your overheads:

• Reduce your travel costs by holding meetings via Zoom or MS Teams
• Move some or all of your business online rather than paying rent for premises
• Reduce IT costs through storing data in the cloud rather than on physical servers.

This is particularly important if seasonality is an issue for your business. In good periods, put aside reserves so you can pay wages, business overheads, and running expenses in leaner periods.

Offering credit can be convenient and help retain your best customers – but it does come with risks. Here are some ways to minimise the potential hassles and risks.

Don’t be tempted to skip this – you risk exposing your business to bad debtors. You can do it without making customers feel as if they’re under the microscope.

• Ask them for details of other businesses they’ve received credit from, and call those businesses for references
• Check they’re legitimate at the Companies Office
• If in doubt, get help from agencies that specialise in credit checking.

Set limits for each customer according to their merits. Once they prove trustworthy, you can consider raising their limit.

Always have a contract which clearly sets out your terms and conditions, including credit terms.

Put good systems in place – for example, set up a debt management calendar, and keep on top of debtors with reminders and repeat meetings.

Be consistent, stick to your systems and processes and follow through when necessary. After all, it’s your business at stake. If you’re considering showing leniency, make sure the customer is worth the risk.

Working capital is the cash you have each month to cover any expenses.

For obvious reasons, it’s a good idea to aim to increase this. However, it’s equally smart to reduce your need for working capital in the first place. You can do this through things like avoiding large personal withdrawals, exploring finance options for major assets, being careful not to over-trade, and reducing your inventory costs.