Cash Flow is the lifeblood of your business. It’s any cash (or cash equivalent) flowing in and out of your business. Keeping an eye on your cash flow is an indicator of how your business is performing.
Not only is it a look into how your business is performing, but effective cash flow management is also essential for your business to survive.
According to The Australian Bureau of Statistics, half of all small to medium businesses fail in the first three years of business. The Australian Securities and Investment Commission states poor cash flow as a reason in 40% of business collapses.
So what exactly is cash flow management?
Cash flow management is the method of tracking how much cash is coming in and out of your business.
By analysing where cash flows to and from in your business, you can identify the trends to combat potential issues before they arise.
Why track your cash flow?
By tracking your cash flow, you are more equipped to predict how much money will be available for your business in the future. It is also an indicator of how much your business will spend on paying employees, suppliers and other debts to your cash flow.
Small businesses are often making financial decisions for the future, depending on cash coming in the meantime. If this payment or job falls through, business owners find themselves in a cash crunch.
By accurately monitoring your cash flow, even down to clients who notoriously pay you late, by accounting for this, you are ensuring your expectations are more in tune with reality.
How to identify cash flow problem
It will depend on your industry and business to business, but if your expenses are greater than your cash, there is a cash flow issue.
Of course, in the early stages of your business, this is likely to be the case. But with proper research and development from a financial expert you can validate how much excess spending will be worth it for your growth or if it will just leave you out of pocket.
Causes of cash flow problems can be a client failing to pay an invoice, seasonal sale fluctuations, a reduction in clients, low-profit margins, not micromanaging your spending, increasing overheads, or holding too much stock.
How to solve cash flow problems
Now you are aware of how crucial cash flow is, it’s time to look at management tools for business cash flow.
- Categorise your spending. You should know EXACTLY what you are spending your cash on, what areas of your business it goes to and the percentages of these. Analyse whether the cash distribution could be improved.
- Keep your books up to date. Not only will this save you sweat come tax time, but your accounting and reporting also need to be functioning at their highest capacity. If this isn’t in your skillset, delegate it to someone who is.
- Get your invoices paid. To maintain a healthy client relationship, we understand it can be easy to allow late invoices. But it’s your cash flow you are sacrificing. Don’t be afraid to take discreet and formal action to get paid.
- Set a benchmark for your cash flow. Get an idea of how other businesses operate and their expenditure to make sure you are hitting the mark.
- Build a cash reserve. Once you have your cash flow management under control, building a cash reserve to cover your business in the event of an unexpected cash crunch.
- Forecast, forecast and forecast. By managing your cash flow, you will have a better understanding of how your business works and will continue to work into the future. Using this information, you can make a detailed forecast to show you when and where to bring in extra cash can help your business grow steadily.
We understand this is just another thing on the business owner’s plates! But in order for your business to survive, managing your cash flow is crucial.
If managing cash flow isn’t your forte, it might be time to hand over the reins to the professionals. Please consider a consultation with a trusted financial advisor to talk cash flow management and projections for your business growth.
Please reach out if you need any guidance. At The Horizon Group, we make numbers simple so you, the business owner, can focus on what’s most important; running your business!