5 methods for improving cash flow in your small business

Joe Kaleb



The most important success factor for any small business is the ongoing availability of cash. In this article, chartered accountant and tax agent Joe Kaleb explains how you can use forecasts, invoicing and other practical tactics to improve cash flow.

Whether you got into business to make money or two choose your own hours, the ongoing sustainability of your business is dependent on the ongoing balance of incoming and outgoing cash.

Influenced by a huge variety of factors, cash flow is a critical measure for business owners as a clear indicator of business health. When cash is readily available and flow is consistent, things are good. If outgoings suddenly spike or incomings dry up, then you’ll be facing a squeeze.

Having a strong grasp on cash flow will allow you to better position your business in tough times by knowing when to cut costs, address pricing issues and even take on additional capital when feasible to do so. This is even more important for seasonal businesses, who can expect to see large swings in cash flow in a cyclical fashion.

So, here are a few simple steps business owners and managers can take to improve cash flow and have increased flexibility, greater efficiencies and potential growth opportunities.

1. Create a cash flow forecast

This is an estimate of the amount of money you expect to flow in and out of your business typically over a financial year period. A budget will provide a better understanding of where surpluses and shortages might arise and assists with making decisions such as planning new purchases or the timing of new borrowing facilities.

It’s important, particularly for growing businesses, to forecast their profitability and future cash flow position at the same time.

2. Invoice properly and action follow-up

The sooner the invoice goes out, the sooner you can be paid. Review your payment terms, ensure that you can identify in a timely manner when clients are overdue, and have processes in place to follow up with customers promptly.

Other suggestions to consider are to invoice progress payments, make certain you have electronic payment options such as BPAY, and offer early payment discounts. If you’re a retailer, you’ll want to make sure your POS systems and processes are as smooth as possible.

No matter what business you’re in, the bottom line here is to make it as easy as possible for your customers or clients to pay you, and that there’s no chance of letting them slip through the net when they fail to do so.

As a prime example, MYOB’s online accounting software has all the features you need and solutions for every stage of your business, including automated invoice reminders, customisable invoice templates and all the reporting you need to accurately track cash flow and more.

3. Review payment terms with suppliers/creditors

There are usually opportunities to negotiate better terms with suppliers, and this can be used to help manage your cash flow and even build your relationship with suppliers.

Take time to review current contracts and take advantage of any discounts for prompt payment or extended payment opportunities (paying early is a good way to make friends in business).

It may also be worthwhile to seek competitive suppliers and obtain comparative rates.

4. Maintain a good relationship with your bank

Meet with your business banker regularly to discuss your current facilities and position to enable a better understanding of the terms of these facilities as well as other available options.

For example, there may be better interest rates available, reduced fees, more convenient ways to pay or the availability of credit. This is especially worth considering in times of natural disaster, as banks will sometimes offer more generous terms (or at least the offer of a review) for affected businesses.

Note that banks are hesitant to lend for any tax liabilities and will likely request running account balance accounts from the tax department when lending.

5. Keep up-to-date with your tax obligations

Don’t forget to forecast income tax, superannuation liabilities and GST payments, plus ensure all lodgements and payments are made on time. The ATO may negotiate payment plans providing all lodgements are up-to-date, but a general interest charge is currently imposed at 7.91 percent. The interest is tax deductible.

In Australia, directors of companies are personally liable for unpaid PAYG withholding and superannuation payments, and this will soon extend to GST payments, making it even more important for companies to lodge on time.

In New Zealand, the Holidays Act in combination with Payday Filing may currently be the source of some business owners’s sleepless nights, and it’s generally recommended that you consult closely with a payroll and tax legislation specialist to make sure you don’t run afoul of the increasing number of labour inspectors.

Regardless of your tax jurisdiction, understanding the impact of your obligations on cash flow is an integral part of staying on top of your business health, so I recommend business owners work hard to stay on top of these details, or make certain there’s someone significantly invested in your business’s success who can.

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