5 common cash flow management mistakes to avoid
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Good cash flow management has never been more important. Try these cash flow management strategies to help protect your business now and in the future.
According to Treasurer Josh Frydenberg, the COVID-19 restrictions could cost the Australian economy as much as $4 billion per week. That’s a bill many businesses can’t afford to pay as widespread closures create serious cash flow problems for companies large and small. However, good cash flow management isn’t only important during times of crisis. It can help keep your business on the path to sustainable success during good times too. Here are some of the most common cash flow management mistakes and how to avoid them.
Good cash flow management doesn’t just happen, it’s the result of a successful strategy. Cash flow management strategies should assess your accounts receivable and accounts payable workflows to identify any potential bottlenecks that might create a hole in your cash flow.
For example, if you offer your clients 30-day payment terms but many of your suppliers expect payment within seven days, you may create a negative overlap in income versus costs that could derail your cash flow.
Does your income fluctuate throughout the year? Do you have larger bills to pay in certain months? Businesses that experience an influx of work at certain times of the year could benefit from a regular cash flow analysis. This could help identify when income is likely to be at its highest and when you expect it to be at its lowest. As a result, you may be able to better plan when you need to control costs to protect your cash flow and when it makes sense to invest in business growth.
Failing to stay on top of overdue payments can significantly hurt your cash flow. Set out your payment terms in all client contracts or service agreements, and ensure due dates are clearly listed on your invoices. Consider using accounting or payroll software to send automatic reminders when an account falls overdue.
You might also want to think about implementing a set schedule of follow-up reminders and final notices. A debt recovery plan you can engage when a final notice is not fulfilled may also be useful. Alternatively, you could engage a debt collection agency if you don’t want to manage it in-house.
Large jobs can be excellent for your business, but waiting until the completion of a major project to be paid can wield a heavy blow on your cash flow. It can be helpful to set a series of milestone payments to keep the cash coming in throughout the term of the project.
You could try to link milestone payments to specific deliverables so your client can see the value and develop a plan for how you’ll handle late payments. For example, does a late milestone payment trigger a freeze on the project? This can help you to avoid making ongoing commitments to a client that is not paying you on time.
It can be tempting to splash some cash on that shiny new equipment, but all major purchases you make should be carefully planned as part of your cash flow management strategy. Likewise, any new hires should only be made as part of your long-term recruitment strategy that takes your cash flow into account as wages are part of a business’ main expense.
It could simply be a matter of waiting until the right time of year to purchase new equipment. On the hiring front, it can be a good idea to bring on new employees on a casual or freelance basis first. This could help protect your cash flow if that big new client relationship doesn’t work out as planned.
Cash flow is like oxygen for your business. Supporting its flow can increase your space to breathe – but without it your business may risk suffocating. That’s why it’s important not to leave cash flow management to chance.
This article is a general overview and should be used as a guide only. We recommend that you seek independent professional advice about your specific circumstances before acting.