It gets drummed into our heads how important cash flow is to run a successful business. According to Xero’s monthly Small Business Insights, 54.6% of Australian small businesses were cash flow positive in July 2019, which means that there’s still a large percentage that are struggling in the area of cash flow management.
The Australian Securities and Investment Commission (ASIC) publishes an annual overview of corporate insolvencies based on statutory reports lodged by external administrators. For the 2017/2018 financial year, inadequate cash flow was 1 of the top 3 nominated causes of business failure.
What makes managing cash flow such a challenge for business owners?
Let’s start at the very beginning – cash flow is the movement of money in and out of your business. We all want more money coming in than we have going out, but as simple as that sounds, making it happen takes some serious planning and insight.
Cash flow management involves both numbers and timing – knowing how much is coming in and going out, as well as when. For example, it would be better to have your clients paying you before you have to pay your suppliers and service providers. Late payments or borrowing to pay expenses both incur interest costs, which will increase the outflow of cash. Building good relationships with your suppliers will help you to negotiate favourable payment terms.
If you are placing orders for stock, you would need to know how much to buy so you don’t have your cash sitting in stock for too long. On the other hand, if you don’t order enough stock to meet demand, you could lose sales to your competitors. It can be quite a juggling act to keep the balance right and knowing your numbers will be a crucial requirement in the process.
What happens if you don’t have enough cash flowing in?
- You can’t pay yourself a salary
- You can’t pay your staff
- You can’t buy stock (for retailers)
- You can’t pay your rent, rates and utilities
- You can’t pay your suppliers and service providers
If you can’t support yourself and your family, have no one to work for you and nowhere to work, you will no longer have a sustainable business. Making sure your business is cash flow positive is what will keep the lights on.
When it comes to managing your cash flow, we suggest looking at the past, the present and the future.
- The past helps you to pick up trends and seasonality, and to define the nature of your business. For example, which are your busy and your quiet months. Knowing your business intimately will help you to understand its cash flow needs and to plan accordingly.
- The present is all about making sure your day-to-day operating expenses are being covered on an ongoing basis and that you budget accurately. Although every business has likely done it at some point, robbing Peter to pay Paul is not sustainable (or good for your stress levels).
- The future involves your dreams and plans for your business, how you want to grow it and where you want to take it. For some it’s about leaving a legacy for their children, while for others about building the business up to sell it for a small fortune (hopefully). Depending on your plans, your cash flow needs will differ.
As much as cash flow in your business is a major priority, so will it be for your clients. Should your business be in the enviable position of cash flow positive, you have the opportunity to expand your service offering and to help your clients with their cash flow management.
FlexiFund It is a fund collection software that provides your customers with flexible payment options while securing the full payment for your services. Not only will you add a new income stream and improve the cash flow in your own business, you will also be helping your clients with their cash flow.
Get in touch to find out more about FlexiFund It Insurance Premium Funding Software, a cloud-based, easy-to-use solution developed to serve the insurance industry.