Here are 6 essential tips for business owners from David Guest, business coach based in Melbourne, on maintaining a healthy cashflow.
Create a balance sheet of all your cash flow
Profit and loss statements are not the full story. A lot of business owners believe they are saving time and projecting their cash flow effectively by focusing just on their profit and loss statements. An unsubstantial balance sheet can hide a pending cashflow crisis. Other factors of your cash flow are just as influential as your profits and losses.
Create a balance sheet that incorporates all of your cashflow’s influencing factors, such as debts, inventory and interest payments. This helps you map out your money’s full story, making your cash flow projection a more effective estimate.
Cash flow budget
Setup a cashflow budget; this will help you to foresee your future expenses and sales.
Make sure you maintain your cashflow budget over time as well. Especially if your cashflow is unpredictable. For low cashflow, ensure you take the time to monitor your bank balances and make executive decisions on which invoices need to be paid and follow up on payments you haven’t received.
Even high cashflow situations can cause a cash crunch. It can be followed closely by a cash shortage; for example, high sales can cause stock decrease and you can lose track of your debtors. Monitoring your cashflow allows you the time and planning to setup credit with suppliers and banks prior to a fall.
Provide clear credit and debtor terms and conditions
If you offer credit to suppliers or clients, make sure you provide clear and specific times and other limitations of the credit you give.
If you have debtors, maintain communication with them to ensure debts are paid promptly. If you can, offer incentives like a discount for prompt payments.
Prioritise your payments
Make decisions about your payments according to the consequences of falling behind in them. Ensure wages, taxes and direct payments are payed on time, the consequences of missing these payments far outstretch the benefits.
Your suppliers might be willing to wait for your payments in return for your ongoing business with them. Consider whether paying early for the discount is better than being without the cash in the long term.
Avoid major purchases in low cash flow stages
You may already be aware of your business’s low cash flow during different stages of the year or you might foresee outside influences affecting your cashflow. Don’t make the mistake of taking large sums from your working capital unless you’re sure you can cover it.
Utilise financial assistance
If your cashflow drops but you can plan a payback scheme, you can benefit from financial products such as overdrafts, funding, and even business credit cards can be used. Just make sure you pay off the debt before the interest is charged.
If you need further assistance, Melbourne business coach, David Guest, can give you guidance on cashflow issues or preventions.