by Deidre Molloy, Director TSP Accountants & Business Advisors. Connect with Deidre on Linkedin here.
Cash flow is the lifeblood of any business. Even if your sales are booming, poor cash flow management can create serious challenges, from late payments to suppliers to the inability to seize growth opportunities. Whether you’re just starting out or looking to improve, mastering cash flow management can make all the difference between surviving and thriving. In this article, we’ll explore five proven strategies to help you maintain a steady and healthy cash flow for your business.
1. Understand Your Cash Flow Statement
Your cash flow statement is one of the most important financial reports for your business. It tracks the movement of money in and out of your business, showing whether you’re generating enough cash to cover expenses.
Key insights from a cash flow statement:
- Operating activities: Are you generating enough income from your core business operations?
- Investing activities: Are you spending too much on equipment or other investments without a return?
- Financing activities: How much cash is going toward debt repayment or funding your business?
By reviewing this report regularly, you’ll get a clear picture of your financial health and be able to spot trends or potential issues before they become problems.
2. Speed Up Accounts Receivable
Late payments from clients can disrupt your cash flow and cause stress. Here are some strategies to get paid faster:
- Invoice Promptly: Send invoices as soon as work is completed. The faster your clients receive them, the sooner they’ll pay.
- Set Clear Payment Terms: Use terms like “Due on Receipt” or “Net 7 Days” rather than the standard 30 days.
- Offer Incentives: Discounts for early payments can encourage clients to pay ahead of time. For example, “Pay within 10 days to receive 5% off.”
- Automate Payment Reminders: Tools like Xero can send friendly reminders to clients who haven’t paid by the due date.
A proactive approach ensures your business gets paid on time, boosting your cash flow.
3. Manage Expenses Wisely
Keeping a close eye on your expenses is essential for maintaining a positive cash flow. Review your spending regularly and look for ways to cut costs without sacrificing quality.
Practical tips to reduce expenses:
- Negotiate with Suppliers: Ask for discounts or better payment terms, especially if you’ve been a loyal customer.
- Avoid Impulse Purchases: Stick to a budget and only buy what your business truly needs.
- Reevaluate Subscriptions: Cancel unused software or services to reduce recurring expenses.
A thorough expense review can uncover hidden savings that significantly improve your cash flow.
4. Build a Cash Reserve
A cash reserve acts as a safety net for your business, helping you cover unexpected expenses or temporary dips in income. Ideally, aim to save 3–6 months’ worth of operating expenses.
How to build a cash reserve:
- Set aside a percentage of each month’s revenue into a separate savings account.
- Use windfalls like tax refunds or bonus payments to boost your reserve.
- Avoid dipping into the reserve unless it’s absolutely necessary.
A well-maintained cash reserve provides peace of mind and financial stability.
5. Leverage Technology
Modern accounting tools can help you manage cash flow more effectively by automating tedious tasks and providing real-time insights.
Recommended tools include:
- Xero or MYOB: These cloud-based accounting platforms provide detailed cash flow reports and automate invoicing and reminders.
- Cash Flow Forecasting: Tools like Float or Futrli integrate with your accounting software to predict future cash flow based on current trends.
- Payment Platforms: Using options like Stripe or PayPal can streamline payment collection and improve cash flow speed.
By adopting these technologies, you’ll save time and gain better control over your business’s finances.
Maintaining healthy cash flow requires a combination of proactive planning, efficient processes, and the right tools. By understanding your cash flow statement, speeding up accounts receivable, managing expenses wisely, building a cash reserve, and leveraging technology, you’ll set your business up for long-term financial success. Remember, small, consistent actions can make a big difference.
At TSP Accountants & Business Advisors, we specialise in helping Australian small businesses improve cash flow and financial management. Get in touch today to discuss how we can help your business grow and scale!
Our team can be contacted on 02 49264155 or via email admin@tspaccountants.com.au