5 strategies for positive cash flow
Managing a business is not just about profit and sales. It is also about managing cash flows to keep the lifeblood of your business flowing – and planning for cash flow shortfalls that can happen at any time. Here are five strategies to consider when planning how to deal with the ups and downs of cash flow.
Your cash flow budget is different to any profit and loss projections you have in your business plan. It should reflect real cash flows – therefore it needs to be live and up to date.
Your cash flow budget should reflect, month-by-month, what the actual money movements are in your accounts. It needs to detail when you receive payments for your sales, and when you are planning to pay your own bills – remembering that a sale is not a sale until you collect the money. It should also seek to project your position in the future.
To estimate next year’s cash flow, consider factors such as last year’s profit and loss statement – and factor in forecasted costs and income such as large one-off sales, and the delivery of expensive capital and business needs such as those required for growth. Plan for different outcomes, including best case versus worst case scenarios, and gauge what the effect on your cash will be.
You need to review this spreadsheet regularly. It will alert you to upcoming demands on your cash flow before they become an issue.
And as always, some expert guidance from your accountant can be really useful, to help get and keep your cash flow budget on track.
Keep on top of monies due and remind your debtors to pay if they have delayed. If debtors are chronically late, you need to work out a way with them to recover your money – and you may wish to evaluate if you still want to keep doing business with them. Make sure you know your legal rights with respect to unpaid debts.
If you’re an eligible Westpac customer using the Biz Invoice online invoicing tool, you can choose to send automatic payment reminders to avoid the time and hassle of chasing invoices yourself1.
And if you’re in the habit of paying your own bills early, you could consider simply paying them on time instead. It may also be worth reviewing your payment terms and renegotiating them if necessary.
It’s often better to start small and build up, keeping your assets and premises in line with the size of your business. Depending on what your accountant or financial adviser says, it may be better to avoid outlaying for big ticket items, which will tie up your capital for long periods. Also, consider the pros and cons of leasing vehicles and equipment instead of buying.
If you are a manufacturer, knowing how much stock to produce is also a fine balancing act. A lost sale is lost forever. Selling excess stock at cut price will help move it – but can also impact your margin and potentially your brand.
How much you charge for your goods and services and where you place yourself in the market can affect the ebb and flow of cash in your business.
Have a close look at your pricing strategy. Are you pricing yourself so cheaply, and are your margins so tight, that you’re chasing customers without much of a positive budget impact? Or are your prices so high that you are losing business to competitors?
Consider if you are in a mass market or niche market and research what the competition is doing. There’s a lot to weigh up when pricing your goods and services.
There may be times – such as during seasonal downturns or to help cover an unexpected expense – when it could be worth considering a finance solution.
Depending on your situation, a business overdraft could help cover short-term costs and cash shortfalls, or a business loan. To avoid having to secure either option with property, you might also like to consider an unsecured business loan or unsecured business overdraft. Explore the costs and terms and conditions with your bank; and check in with your accountant to understand if short-term finance is suited to your business.
Every business has peaks and troughs, and for many it’s part of their trade. Managing your cash flow carefully will help your business avoid the stress of cash shortfalls and reach its full potential.
1. To be eligible for Biz Invoice you must hold a Business One Low Plan or Business One High Plan or foreign currency account (excluding the Chinese Yuan RMB foreign currency account) and be registered for Westpac Live Online Banking. Terms and conditions, fees and charges apply. Before making a decision, read the disclosure documents for your selected product or service, including the Product Disclosure Statement and T&Cs for Westpac business bank accounts, foreign currency accounts and Westpac Live Online Banking by clicking the above links; and consider if the product is right for you.
The information in this article (including any finance information provided) is general in nature and does not take your objectives, financial situation or needs into account. Consider its appropriateness to these factors; and we recommend you seek independent professional advice about your specific circumstances before making any decisions.