Whether you're new to the world of small business ownership or have been at it for a number of years, you undoubtedly know cash flow is the lifeblood of your business and your ability to produce quality products and services. Australia is a big place — its own continent, in fact — whose residents are eager to improve their lives by leveraging what businesses are selling. The problem is many competing organisations — over 2.3 million and counting, based on the most recent figures available from the government — are vying for the same customers as you. Unable to keep pace with the costs of keeping the lights on and doors open and retain customer traffic, many are unable to survive, closing their doors permanently mere years after opening them.
Given the fallout from COVID-19, it's almost certain that the business attrition rate will rise in 2020 and perhaps beyond. While the reasons vary as to why, poor cash management is frequently a contributing factor. Indeed, according to data from the Australian Securities and Investment Commission, of the top three main causes of business failure, inadequate cash flow is routinely among the leading reasons. Indeed, in 2018, it was the No. 1 reason, cited in nearly 47% of cases.
This issue is not unique to Australia; it's a problem in numerous industrialised economies. Take the U.S. as an example. One of Australia's largest trading partners, U.S.-based companies that fold consistently cite insufficient or negative cash flow as one of the causes, according to ongoing analysis by CB Insights.
The best way to improve cash flow derives from better management of it. The following tips can help you with this relentless task, whether you're struggling with it now or seek to avoid it becoming an issue.
1. Identify inflows and outflows
Cash flow is all about movement and the amount of money that is being transferred into and out of the business. It's ultimately the straw that stirs the drink. But have you ever actually sat down and recognised when, where and how those funds are moving? It sounds simple enough, but many get caught up in the day-to-day affairs of managing business activities that they neglect the very thing that makes those activities possible. This step requires reviewing your records to see when invoices are sent out and paid for, and by extension to determine when purchases can be made, so there is always money to draw from. There are several ways of going about this, whether that's by creating a budget or staggering when invoices are sent out, and/or meeting with a professional adviser. They can provide insight into cash management and forecasting or take care of it for you.
2. Ensure cash is always on standby
It's a terrible feeling to function on a cheque-to-cheque basis in your personal life; as many as 46% of Australians are in such a situation, per News.com.au. These struggles have likely worsened in light of the economic shockwaves resulting from COVID-19. You're flirting with disaster when this is your standard operating procedure as a small-business owner. Most business encounter struggles with liquidity. But knowing you have a fund to fall back on when the need arises helps to reduce stress and gives you more freedom to stay focused on taking the kind of efforts that may right the ship.
If you can, aim to put a portion of your incoming cash toward a savings account that accrues interest at regularly occurring intervals. The key here is to do so consistently.
3. Establish hard deadlines for payments
Every business wants to be as lenient as possible when it comes to how their customers pay; "buy now, pay later" is a highly desirable advantage that many customers leverage. The problem is if everyone takes you up on delayed payment, it can leave a gaping in cash flow that requires your cash reserves to fill. Prioritise setting dates for when products and/or services must be paid in full. One way of ensuring you're compensated in a timely manner is through autopay. These are mutually beneficial by seamlessly deducting funds from your customers' credit card or bank account, thereby paying you and giving your customers one less bill to worry about.
4. Grow slow
Every business owner seeks growth, even those that want to remain small. After all, growth can be realised in many different ways, such as locations, revenue or staffing. Avoid the trap of growing too quickly. Seeking to expand to a different location or buy new equipment can prevent cash flow from being utilised in more pressing capacities, so take extra care with planning in 2020 & 2021. Taking growth slow and steady will get you further in the long run.
At WMC Accounting, we can help you put measures in place to ensure cash management is your company's strong point. Contact us today to learn more about how we can help your firm find its financial footing.