Cash Flow Management
Small Business Update
We’re pleased to send you the first article in our Small Business Updates series.
We’ll post a new Update every few weeks on a topic that we think will be of particular interest to our small business clients.
Have you ever heard that “Revenue is vanity, profit is sanity, but cash is king.”
The message is clear and simple. Your sales numbers are great to talk about and showing a profit on a piece of paper at the end of the tax year is the goal of all small business owners, but neither indicates that a business is a viable enterprise. Only reliable and stable cash flow can truly demonstrate the capacity for ongoing success.
On that note, our first article looks at the importance of cash flow and offers some tips on how to manage it better.
Cash Flow Management
All small businesses begin with great enthusiasm. The work comes in, the owners work around the clock, the invoices go out, and the owners presume this means everything’s going well. But the harsh truth is that if you haven’t taken care of the basic numbers, even the most apparently successful enterprise can go broke.
Taking care of the numbers needs to happen in two ways. The first is the short-term view. This relates to making sure you have enough cash available in the business for it to continue to operate from day to day to day, week to week and month to month. The second is considering the long-term view. This involves looking at longer term patterns of growth, profit, loss, expenses and planning from one year to the next and beyond, for continuing success.
While it sounds obvious, cash flow management is one of the critical things that small business owners often avoid focusing on. This happens for a variety of reasons: lack of time, financial illiteracy and fear of what they might find. Instead of crunching the numbers so they know exactly what they’re dealing with, many small business owners presume that their cash flow will take care of itself as long as they keep the work coming in, and the invoices going out. But this is not always the case. Sending out invoices is just the beginning. It’s equally important to ensure that those invoices get paid in a timely manner.
So where do you start with cash flow management? We’ve put together some tips to help you get going:
- Invest in good accounting software. This will allow you to know your cash position at all times and help you to forecast your cash flow into the future.
- Update your books of accounts regularly to keep them accurate. This will save you time, money and stress later.
- Review your Debtors Days every month and watch the trend. This is the average number of days you have to wait for your clients to pay you. The bigger the number, the longer you’re waiting.
- Put a payment Due Date on your invoices. This will make it easier for your clients to know when to pay you by and for you to pursue them when they’re late.
- Politely pursue late payers. Sending a gentle but prompt reminder that an invoice is due will keep cash flowing. Equally, don’t be frightened to take firmer or more formal action when needed.
- Keep business and personal finances separate. This is vital to be able to accurately assess your businesses true performance and cash flow.
- Understand that growing too fast has drawbacks. Growth often requires more cash than many small businesses have at hand so it’s important to grow in line with a strong, well thought out plan.
- Have a cash buffer. Unexpected things happen. Some of them are good: like great opportunities that you want to take advantage of. And some of them are tough, like economic downswings or changing buyer behaviours. But in either case, a cash buffer will help to keep things running smoothly.
Remember, you don’t need to do this alone. If you’re not confident with the numbers or simply don’t know where to start, we’re always here to help.
To find out more please contact us on (08) 9227 6300 or .
Important information and disclaimer
This publication has been prepared by AustAsia Accounting Services Pty Ltd, Registered Tax Agent No 7587 3005.
Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Accordingly, reliance should not be placed on the information contained in this document as the basis for making any financial investment, insurance or other decision. Please seek personal advice prior to acting on this information.
Information in this publication is accurate as at the date of writing, 22 February 2019. In some cases the information has been provided to us by third parties. While it is believed the information is accurate and reliable, the accuracy of that information is not guaranteed in any way.
Opinions constitute our judgement at the time of issue and are subject to change. Neither the Licensee nor any member of the AustAsia Group, nor their employees or directors give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.
Any general tax information provided in this publication is intended as a guide only and is based on our general understanding of taxation laws. It is not intended to be a substitute for specialised taxation advice or an assessment of your liabilities, obligations or claim entitlements that arise, or could arise, under taxation law, and we recommend you consult with a registered tax agent.