How to increase cash flow in your small business

How to increase cash flow in your small business

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What’s your biggest worry for your business?

How to increase cash flow in your small business?

Cash flow tends to top the list for many business owners, and for good reason. ASIC’s  report on corporate insolvencies shows that year after year, inadequate cash flow remains a key reason why businesses fail.

But it’s possible to get your cash flow under control — and even improve it. We know this because POP Business has supported many clients across various industries to do the same.

And we can help you start your journey to stronger cash flow. Today.

We’ll firstly go through the basics to give you an understanding of why cash flow is important to businesses, then we’ll share our best tips so you can manage your receipts and outgoings better.

What is cash flow?

Cash flow refers to the movement of money — what comes in and what goes out. Cash inflow happens when customers pay you while cash outflow occurs when you pay your bills.

If you’ve got more money coming in than leaving the business, then you have positive cash flow. But if the reverse is true, then you have negative cash flow.

Why is it so important?

Cash flow is a good indicator of financial health.

Put simply, negative cash flow is worrying because you can only spend more than you receive for so long before you go out of business.

Even if sales are going up and your outlook is profitable, you can’t pay loans, suppliers, employees and other creditors without money in the bank. That’s why it’s important to remember that profit is only a notional concept — cash is the real cornerstone to staying in business.

When you have excess money in the bank, you’re able to focus beyond keeping your head above water. You’re well positioned to operate strategically and take advantage of opportunities that come along. You can invest in your company’s growth — by hiring extra staff, providing quality training, purchasing more suitable equipment, and so on.

So How to control cash flow in business? 

A good place to start is a cash flow forecast.

How can a cash flow forecast help a business?

Essentially, a cash flow forecast is a planning tool. By recording how much money you’re expecting to come in and when, and the timing of outgoing payments, you’ll be able to anticipate shortfalls and identify ways to address any gaps.

To be effective, cash flow forecasts should be prepared, analysed and updated regularly.

But if you’ve never done one before, don’t worry — POP Business can show you how to calculate cash flows, build cash flow forecasts and look for improvement opportunities.

For growing businesses, being on top of cash flow and having a firm grasp on financial performance and position is even more vital. A Chief Financial Officer or CFO is indispensable for this, and our team of expert consultants can fulfil this role through our Virtual CFO service. You’ll benefit from strategic advice and data-driven recommendations — without paying for the cost of an in-house equivalent.

How to control cash flow in business?

How to increase cash flow in your business?

Below are our ideas on how you can boost your cash inflows or reduce spending. While you can implement them without accounting software, connecting to the cloud will save you time, bring greater accuracy and allow you to harness available data to improve your business.

1. Invoice earlier

Customers tend to pay after receiving an invoice so it makes sense to issue them earlier. Leading accounting software such as Xero or Sage allows you to invoice online immediately on completion of a job or the dispatch of goods. You can send invoices conveniently via email too, and schedule recurring invoices for regular customers.

2. Review debtors’ report

Routinely review account receivables so you know who owes you and how long their account has been outstanding. Use this information to set or revise your trading terms. You could consider offering incentives like early payment discounts or discourage late payments through penalty charges. For new or slow paying customers, taking full or part payment upfront could be an effective strategy. You might also offer additional payment options, including mobile and online payments, to make it easier for customers to settle their invoices.

Most accounting software will have in-built Account Receivables Ageing Reports you can easily run.

3. Analyse spending

If you want to cut down on unnecessary expenditure, then you need to know what your regular business costs are. Look carefully and ask yourself whether you’ve shopped around to get the lowest costs, particularly for essentials like the internet, utilities, telephone and banking facilities.

Again, you can gain in-depth insight on your expenses from integrated reporting tools if you’re connected to the cloud.

4. Spread costs

For those with fairly consistent month-on-month cash inflows, it may be worth spreading the costs of bigger purchases — like laptops, vehicles and items of equipment — through leasing instead of paying for them outright. This is a great way to make your cash flow position more predictable, control costs and avoid large cash outflows.

5. Avoid late fees

Settling your debts on time saves you from late payment penalties. You could try to negotiate better payment terms too — say from 30 to 60 days — so you can hold onto your cash for longer. If your suppliers offer early payment discounts, make sure you take advantage of them as well.

When you enter bills into cloud accounting software like Xero, you can set reminders and schedule payments so they’re settled on-time. You can also keep track of bills and analyse charges over time so you’ll know when costs are going up.

6. Evaluate stock

It may be possible to reduce stock on hand without affecting your operations and customer experience. This could lower storage and other stock-related costs.

By identifying slow moving stock and removing them from your product offering, you could focus on popular items that sell quickly instead.

How to control cash flow in business? 

Similarly, if you figure out which products deliver higher profit margins and concentrate on these, there will be a positive impact on your costs and cash flow.

As you can see, the timing of your outgoings and receipts and the way they’re managed have a big impact. If you want help to implement some of these measures or engage in a virtual CFO to look after the financial health of your business, call POP Business today. Our experts can provide tailored advice to optimise your cash flows. As a Xero Platinum Partner, we can also connect you to the cloud to transform your business processes.

We offer all our clients a 20% discount on their Xero subscription, so talk to us today!

Picture of Patrick Sargent

Patrick Sargent

I am a chartered accountant, registered tax agent and a co-founder and CEO of POP. My passion lies in creating high-performing teams, optimising business processes and leading the strategic direction of the business. I am also a member of Chartered Accountants ANZ and a Fellow of the Australian Institute of Company Directors. My expertise includes helping small businesses with a range of accounting services, including: tax preparation, business advisory, accounting and bookkeeping, and personal tax planning, as well as company, trust and partnership tax returns and more.

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