‘Cash is king’ is an old saying that is often used to refer to the running of a business, unfortunately, it also refers to the mismanagement and sometimes failure of a business. Businesses must have cashflow in hand for various reasons, investing in the business's infrastructure or equipment, or even a directional change. Nevertheless, a business needs to have a healthy cashflow to secure its future.
What is a business cash flow?
A business cashflow is money moving both in and out of a business in any given month — although, sometimes misinterpreted as money flowing one way, out of the business — it flows both ways.
There is cash coming into the business from clients or customers to pay for your goods or services. They may not pay immediately, for example at the time of purchase, and a service may take longer than a month, therefore this is known as accounts receivable.
There is cash going out of the business, this would include cash for employee wages, rent of premises, loans etc. This is known as accounts payable.
Why is cashflow important?
The lack cash coming into a business, as well as cash reserve, are the main reasons businesses fail today.
Your business could be showing a profit, however, with no cash flowing or a cash reserve — a profitable business can fail. The reason for this is that profit is an accounting term. Your business accounting system could be showing income when an invoice is sent, not when it is received, or even if the customer or client hasn’t paid.
Tips on how to manage your cash flow
1. A good cash flow forecast will help you to monitor when you have money coming in and going out of your business. A good understanding of your cashflow can help identify possible shortages, acting as a good identifier of possible warning signs to avoid future financial problems. Your cash flow is only as good as your accounting and reporting, it’s important to get this right as it helps, at a glance, to have an understanding of your business financial situation. Moreover, having a reliable cash flow forecast will help you keep track of key business metrics, such as the best time to invest in new opportunities.
2.Effective cash flow management also means keeping outgoing payments to a minimum. Look for opportunities to save money by streamlining business practices and reducing operating costs, for example:
- identify areas where you can reduce wastage or improve production efficiencies
- review subscriptions, phone and internet service contracts when they become due for renewal to ensure you’re getting the best deal
- If you rent your business premises, negotiate your lease with your landlord negotiate with suppliers for better buying opportunities
3.Managing terms of credit for payments made to your business an important measure to maintaining cash flow. To avoid late payments issue invoices that state clearly your terms of payment. Payment terms are considered a part of the sales contract and as such are governed by contractual law in Australia, failure to comply means a breach of contract. If your business supplies a service that requires a large amount of money or the time to deliver on that service is over a lengthy period of time, consider asking for milestone instalments and/or payment upfront.
Make it as easy as possible for customers to pay you by offering them several payment options such as having your bank account number on your invoices, credit card options, and accepting additional payment systems (ie. EFTPOS and PayPal).
Receiving payments faster will boost your cash flow. You may consider offering an incentive such as discount to encourage customers to pay early.
4.Build a cash reserve. Access to money when the business needs it is the key to success.Having a cash reserve gives you the confidence to ride any unforeseen circumstances, such as an economic downturn.
As part of the government’s 17 billion stimulus package for businesses announced this month to providing a helping hand to small and medium business, include.
supporting business investment
providing cash flow assistance to help small and medium-sized business stay in business
and keep their employees in jobs
The new stimulus package that is in place supports businesses with an aggregated annual turnover of less than $500 million. This means businesses such as Agriculture, Manufacturing, Wholesale, Engineering, Medical Suppliers and Trades such as Bakers or Butchers that are needing to invest in machinery, office fit outs or a large truck can benefit.Measures outlined in the package to support business investment include:
- $700 million to increase the instant asset write-off threshold from $30,000 to $150,000 and expand access to include businesses with aggregated annual turnover of less than $500 million (up from $50 million) until 30 June 2020.
- $3.2 billion to provide a “time-limited” 15-month investment incentive (through to 30 June 2021), by accelerating depreciation deductions. Businesses with a turnover of less than $500 million will be able to deduct an additional 50 per cent of the asset cost in the year of purchase.