One of the most common issues that business owners of all sizes face is managing their cashflow.
And the time and effort of dealing with these issues often pull attention away from the actual management of the business—which is what becomes the greater problem.
So we’ve compiled some easy tips that business owners can use to manage their cashflow more effectively. Our goal is to help you stop worrying about it, and get back to what you do best.
Liston Newton Advisory has over 40 years of experience helping businesses access the advice they need to grow. Get in touch for comprehensive business advice including a free business strategy session.
Tip 1: Forecast your cashflow
This may sound like an obvious tip, but it’s something that many businesses don’t do well—if at all. There’s an art to forecasting accurately, and it goes far beyond simply analysing your budgeted Profit & Loss.
As you’d know, the profitability of your business is just one factor involved with your cashflow. There are a number of other factors you need to consider in order to get it right. These can include:
- How long it takes your clients to pay you
- Any debts you need to pay, such as bank loans, vehicle finance, and other large debts
- Whether your owners take out dividends or profit distributions
- Any necessary ATO payments
These are just a few examples of items that can cause a difference between your profitability and cashflow.
With a proper forecast that takes these into account, you’ll be able to create a more effective cashflow view. It also gives you the ability to workshop different ideas within your business, and see the impact this makes to your cashflow.
Together, this enables you to make the right business decisions and identify any future cashflow issues before they arise.
Tip 2: Speed up how long it takes to receive money from your clients
One of the most effective ways to dramatically improve your business cashflow is to get paid quicker. Due to the nature of their business, most businesses are typically forced to spend quite a large amount of cash before they even get paid for their work. Whether it’s paying for products to on-sell, or paying their staff for time incurred, there’s usually quite a gap in the outgoings to incoming cash.
We acknowledge that this is just part and parcel of running a business, and it’s something that most businesses won’t ever be able to eliminate completely. But there are a number of ways you can help to reduce the time lag between money going out of your bank account, and money coming back in.
- Implement an effective accounting system that speeds up the invoicing process. A big issue for many businesses can be getting the invoice out in the first place. So, with the right software—such as Xero—you can simplify and speed up how you send your invoices.
- Have a proper process for debt collection. Some people honestly forget to pay invoices, and need a reminder to prompt them. Others may need a little push to pay their bill. Having a set process to follow up outstanding debtors helps to reduce outstanding invoice balances, and works to improve your overall cashflow.
- Provide alternative payment methods. This might be annoying for some, but having multiple payment methods available to your clients gives them more options to pay the way they feel most comfortable.
- Place clients on monthly service offerings. This will likely be the hardest of these tips to implement, as it requires taking existing clients from a known service model to a monthly retainer model. But when achieved, it can have the greatest positive impact, as clients are now prepaying for the service you offer. You’re not waiting around for invoices to be paid—it happens automatically every month.
Tip 3: Manage your Creditors and other repayments
Businesses struggling with cashflow will most likely be doing this naturally out of necessity. But it’s important to remember that you don’t need to pay anyone before the payment is actually due. By paying early, all you’re doing is effectively reducing your available cashflow (unless you’re offered a discount for early payment, that is.)
You can also look to negotiate payment terms with creditors, where possible. Even getting an extra seven days can open up significant cashflow for your business.
Tip 4: Plan your ATO debts and superannuation contributions
A common cashflow burden for many businesses is their quarterly activity statement and superannuation payments. Here are some simple tips to manage these payments.
By law, super is only required to be paid quarterly. But you can pay it as frequently as you like.
Historically, business owners have made super payments quarterly so they can reduce the administration involved. But with advances in accounting software, this isn’t as much of a problem anymore. If it is, then you’re probably not using the right software, and is a whole other issue you need to address right away.
At Liston Newton Advisory, our view is that super should form part of your regular payroll. This allows you to pay your staff and pay your super at the same time, reducing any liability that can build up over three months. At a bare minimum, it’s best to try and pay your super expense monthly.
Businesses with large revenues and high staff numbers know how large their quarterly activity statements can get, particularly after a period of high trade. Managing these payments is crucial, as it helps you understand what available cash your business has.
If you have a large number of staff and a high payroll, it’s likely the ATO may have already forced you to pay your PAYG monthly. But if they haven’t, consider changing to a monthly payment. This helps you reduce the huge quarterly bill, replacing it with a series of monthly bills. This makes it much easier for your finance department to manage.
You also need to understand your GST liability as the quarter progresses, so you can move your GST to a relevant savings account. It’s helpful to establish an internal process that moves your running GST and income tax liability to a separate account. This gives you a much more accurate idea of your ‘working account’.
Tip 5: Review your entire business model—and your pricing
We saved this tip for last, because if you’ve effectively implemented the above tips and your business is still experiencing cashflow difficulties, then it’s likely there’s a bigger issue. This could be with your business model, or the pricing of your products or services.
If your current business offering isn’t enough to help you make sufficient profits then your cashflow is always going to be poor. This could be due to several high operating expenses, employing more staff than you need, or your product or service price being too low.
If you determine that this area of your business is an issue, then a review is going to take some time, and a lot of work. But it’s an important one, and imperative to fix it as quickly as possible.
The final word
Improving the cashflow of your business can take time—but time that has huge benefits in the long run. These 5 ways to improve cashflow have been proven to work, and are the first step in implementing a strong cashflow management system.
So to get support in implementing these tips, and more, Liston Newton Advisory is here to help set your business up for success.