Managing cash flow is core to the long-term success and viability of every family business, both big and small. Here are a few key tips to help manage your cash flow.
Manage your debtors
– It is important to really know your customer. Before you provide credit terms, check that you have all of their information. If the deal is big enough, run a credit check on the potential customer.
– Set and agree your credit terms clearly up-front. Ensure your customer knows exactly when payment is due and to whom, and that invoices clearly show your terms and your banking details. Feel free to offer terms that work for both you and your customer but try to keep them under 14 days.
– Invest in technology such as online payment. Getting cash on-site rather than issuing an invoice and waiting for payment can really speed up your cash flow.
– Offer to spread their payments over time. This may not work for everyone, but for some customers it could make the difference between paying and not paying. Avoid offering to spread this over a long period – you are not a bank!
– If customers do default, chase the debt early, not later. It pays to develop a positive relationship with your customer to help with this. If you are struggling to receive a payment, consider hiring a debt collection agency. Just ensure you choose an agency that you are comfortable acting as an extension of your business.
Manage your creditors
– It’s important to build good relationships with your suppliers. Ensure you make payments on time whenever possible so if you do have a period of cash shortfall, they are more likely to extend your credit terms.
– If you do hit a rough patch, don’t be afraid to ask for extended terms or to spread your payments over time.
Manage your stock
– Review what is selling and what isn’t. Cut the slow moving products and sell them as quickly as possible, as holding stock just locks your cash away.
Do a cash flow forecast at the start of each year, and update it every quarter
– Consider different scenarios – what would happen if your biggest customer didn’t pay? Or if your average payment terms increased? Regularly update it and track your progress to avoid surprises.
– Reconcile your bank account daily to check payments coming in and out. Good accounting software should provide daily bank feeds that are coded automatically so you are always aware of your cash balance.
Work with a good accountant
– Not only can they help with your cash flow forecast, but they can monitor your cash flow, and can also speak to your late-paying customers on your behalf. MYOB research found SMEs whose accountant was an adviser were 31 per cent more likely to see an earnings uplift in the past year.
Consider how you finance your working capital
There are many ways to manage your cash through financing arrangements including:
Credit card – recommended to be used in working capital management in an emergency if you need cash. Just ensure you pay off the balance in full each month or you risk making your cash flow worse in the long run.
Bank overdraft – flexible, easy to implement and cheap in the short-term, but is not ideal as a long-term solution for running your business as the interest rates are higher than a normal bank loan.
Bank loans – more suitable when you are growing your business. The approval process can be arduous and you are locked into repayments for a long time. Generally they will be secured over your business assets so they could be at risk if you default.
Leasing/sale and lease-back – leasing allows you to purchase new equipment for your business without any upfront outlay, and many have tax advantages. For sale and lease-back, you can sell an asset (such as property or vehicles) and lease it back for a lump sum of cash up front. As with bank loans, you are locked into the repayments and there could be penalties if you cancel.
With all of the above, it is vital to separate your personal finances from your business finances. That way if your business gets into difficulty it won’t impact your personal credit rating.
There are many ways to ensure your business cash flow stays healthy, but most of it comes down to good communication with your customers, suppliers and banks. In addition, working with a good accountant and implementing the right business management software can help you manage your business without focusing on your bank balance every day.
Richard Moore is MYOB's chief financial officer.