Positive cash flow is more than just staying in business it is making your business as efficient as possible. By taking control of cash flow, you can reduce the amount of money you need to keep your business running from day to day and earn a higher return.

The trouble with cash flow

Cash flow can be hard to manage. Traditional accounting tools are designed to produce balance sheets and profit and loss statements — snapshots of your finances at a particular moment or period of time. They do not capture your changing cash requirements through the year.

Even the cash flow statement in your annual accounts looks at history, a summary of how your cash balance has changed over the last 12 months. While it can help you diagnose past problems, it can’t help you anticipate future ones.

Many businesses also have their cash within multiple financial institutions, making it hard to grasp their current cash flow position without time-consuming reconciliations.

Taking control

The first step towards taking control of cash flow is to consolidate your banking with a single institution, simplifying administration and giving you complete visibility of your current position through your online banking service. You’ll save money on fees, too.

Next, you need to create a cash flow forecast. Your forecast shows exactly how much cash will flow in and out of your business each month. It helps you identify potential crunch points and makes sure you have cash on hand to meet them.

Tracking your performance

Next, you need to track your actual cash flow performance from week to week. That means you need an easy way to assess your current cash position. An important first step is to consolidate your banking so that you have complete visibility across all your accounts.

Cash flow facts

• 43% of business owners say managing cash flow is a challenge (Commonwealth Bank and Investment Trends Business Owners Survey, November 2007).
• Around two-fifths of the companies that failed between 2004 and 2007 did so because of inadequate cash flow (Australian Securities Commission Report 132, External Administrators, June 2008).
• Businesses are taking longer to pay their bills, with average payment terms blowing out to 56.5 days (Dun & Bradstreet, January 2009).

• The cash flow cycle

  Every dollar you invest in your business goes through the cash flow cycle before it comes back to you, bringing some profit with it. So the faster you can make the cycle turn, the more successful your business will be.

  

   

  The cash flow cycle in action

  For example, imagine you buy $100,000 worth of stock, then sell it at a 40% profit. When the account is paid, you receive $120,000 in cash. Then you can either:

  • Reinvest the full $120,000 in your business and make another 40% on that. The more often you can do that, the more profit you can make.
  • Keep the same $100,000 investment cycling around your business and use the profit for other purposes. The faster the cycle turns, the less money you need to plough into your business.

  On the other hand a slowing cash flow cycle means you need to find extra cash to keep your business running. If sales slow down, accounts receivable blow out or production slows, you may need to go into your reserves or borrow and that could be costly.

  Again, consolidating your banking can help. Time wasted shuffling funds between banks can be a big brake on your business.

  Cash flow warning signs

  A business could be having serious cash flow problems if:

  • Its suppliers regularly go unpaid for more than 60 days.
  • It has frequent disputes with suppliers or changes suppliers regularly.
  • It often lodges it's BAS late.
  • Employee super payments are significantly in arrears.
  • Suppliers insist on cash-on-delivery.

   

  • Consolidate your banking

    Most businesses wouldn’t dream of having more than one stationery supplier or buying their stock from a different company each month. But many don’t think twice about splitting their banking between several banks. Yet bringing all your accounts together with one bank could be the most important single step you take to get cash flow under control.

    When you consolidate your business with a single supplier, you increase your bargaining power by building a stronger relationship. You also cut down paperwork and make it easier to control costs without time-consuming reconciliations. The same thing applies to your banking.

    Most importantly, by consolidating your banking you can get a complete picture of your cash flow position, and then move funds around at will.

    Cash flow tips

     

    Small businesses	Medium businesses
    Managing cash	If possible, keep three to six months expenses in reserve. Invest surplus cash in a Business Online Saver to get higher returns and instant access when you need it. Every business has seasonal ups and downs. Use an overdraft or business credit card for extra cash when sales are slow.	A flexible financing option like a line of credit lets you draw down funds at will, up to your credit limit. Then you can reduce your borrowing costs by parking working capital in your loan account until you need it.
    Managing expenses	Cut paperwork and simplify expense management with electronic payment solutions like bpay or direct credit. By consolidating your business with a single supplier, you can improve your bargaining power, potentially negotiating better terms of trade.	Paying paper invoices costs time and money. Use your computer to create templates and scheduled payment files, simplifying or automating recurring payments.
    Managing stock	The longer stock stays on the shelf, the longer your working capital is tied up. Turn over excess or outdated stock, even at a discount. Know which products have the highest margin, then focus your marketing on them.	Consider changing your pricing structure to increase your inventory turnover, potentially making more profit while charging less. Aim to cross-sell low cost, high margin products.
    Managing accounts receivable	Always issue invoices as soon as possible. Provide convenient electronic payment options to your customers to speed up payment and ease reconciliation.