According to the the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), a lack of cash flow is the #1 leading cause of small business insolvency, and personal stress for the business owner.
So how can businesses better plan for those likely cash flow challenges?
- Plan for the worst case scenario
In any business, it’s a good idea to plan for a worst case scenario. Why? Because when the unexpected happens, the decisions you make and how quickly you make them can mean the difference between your business surviving or failing.
Ask yourself what your business is dependent on? Is it staff, a specific consumer category, a raw material, weather conditions, market conditions? It’s always a good idea to assess the risks of those dependencies to your business.
Create a risk list. For each item on your list, create a plan to mitigate it. Document your plan and review it on an annual basis. Include your team members in this exercise. They will most certainly bring a different and valuable point of view.
- Get paid on your terms
Payment terms is a nightmare for most businesses. In fact, according to a 2017 ASBFEO report, late payment terms is the first source of cash flow stress for small businesses. Recent figures show the average 30-day invoices for small businesses are paid at 36.3 days (source: May 2018 Xero Insights Room).
How well do you communicate your payment terms? Are they clear and stated in writing to your customers? Have you explored ways to incentivise early payment – such as a small discount on an early payment?
Some best practice among professional services businesses is to secure an upfront payment, and progress invoicing as part of the service delivered. All these strategies can help bring the cash flow in, and forward.
- Understand the seasonality of your business
Is your income subject to seasonality? End of Financial Year, holiday season, summer, winter? If you sell ice creams, how will you manage cash flow in winter? Understanding your market seasonality well means you can plan for times when cash won’t be flowing in.
Makes sure your understand your fixed costs, and variables, so you know how much flexbibity you have to adjust your budget. Keep a small cash reserve in place to support your business through tough times.
The ideal scenario is to have as much income as possible on contracted or recurring terms, so that it covers most (if not all) your fixed costs.
- Forecast your cash flow
Forecasting your cash relies on good accounting practices, such as regular bookkeeping, to help you track your receipts and bills against your budget.
Leverage the modern accounting software on the market – many provide forecasting tools out-of-the-box. They can help you catch gaps in your budget before they happen.
Get into the habit or running a monthly report of your position. Be diligent, and consistent.
- Avoid bad debt
How much time are you spending chasing payments? Are they always the same debtors? It might be a good idea to dedicate time to actively monitor and follow up outstanding debtors.
Get on the front foot, and ensure your debtor aren’t putting your cash flow at risk. There are good web sites to protect yourself from bad debtors. For example, Creditor Watch can help you perform a credit check on any Australian company.
- Get smart about your cash
Start with a clear understanding of our cash flow forescast – ie. where will your cash be coming from in the future. Then revisit your business plan and projected growth. Do you need capital for a new project, business expansion, technology or equipment refresh?
Have you considered asset finance? It can help you retain your cash reserves, minimise impact on your cash flow, and also help you obtain the capital you need for your project.