Cash flow is the lifeblood of a small business, and in light of our current global economic crisis, cash flow management is even more critical than ever before. International services company Deloitte recently compiled a report titled “COVID-19: Managing supply chain risk and disruption”. One of the key recommendations for businesses was to focus on cash flow. Disruptions to cash flow, due to COVID-19 economic ramifications, they stated, will have “implications across the extended supply chain that can’t be underestimated.” And they recommended, “companies should immediately develop a treasury plan for cash management as part of their overall business risk and continuity plans.”
So how can your business focus on cash flow management as restrictions ease and our country begins to reopen? Well, here are 5 top tips on how to actively monitor and manage cash flow within your business. And remember, don’t make any major decisions about software implementations, or credit services without speaking to your bookkeeper first.
1. Get your accounts in order.
In 1947, way before cloud accounting, computers and the World Wide Web, a clever cookie came up with a marketing slogan “A cluttered up desk is a sign of a cluttered up mind” and had the saying printed up on a series of gift items. Well, fast forward over 70 years, and the same idea can be applied to your business accounts, except now it should read “cluttered accounts is a sign of a business not in touch with its cash flow and most likely to fail in 2020”… Not as catchy, but the sentiment remains the same!
It’s never been easier to have clear, organised accounts. There are a plethora of cloud-based accounting software tools out there that are easy to use and easy to set up. It is VITAL to understand how your business is performing, and the only way to do that is to have an overall picture of your business accounts. So now is the time to get out of the receipts-in-a-shoebox habit, and get yourself organised.
What’s more, a reliable accounting system will help you track and report on key business metrics. Having a good handle on these business metrics will help you manage your cash like a pro – and take advantage of new opportunities.
2. Plan, budget & monitor
Now that you can see where your accounts lie, it’s time to analyse and monitor your budgets, expenditure and projected earnings. To keep your doors open once we’re all allowed out again means knowing your ‘cash in’ and ‘cash out’, and ensuring the cash-in will be enough to cover all expenses.
Beyond that, managing expenses is critically important. While not spending is ideal for making sure “cash-out” is less than “cash-in” – it’s not really how business works and is not an option for most businesses. So while limiting spend is recommended, there will undoubtedly be times when you need to invest more to guarantee a return. By asking yourself pertinent questions like “Will this expense help me keep my doors open?” you can gauge – and control – your expenses.
But monitoring your cash flow and seeing the spending is less than your earnings does not guarantee business success. You can’t just assume that your business will be successful if you make a profit.
Analysing your numbers gives crucial visibility into whether you are charging the right amount for your work, or if current margins or markups on materials and labour need review.
Although forecasting during uncertain times is difficult, it’s more important than ever to track and predict your business earnings, so you can accurately plan for the future and prioritise spending to achieve your goals (and viability).
3. Collect your debts.
While everyone is having to juggle their accounts as supply chains the world over are disrupted, you still need to maintain your invoice terms and ensure your customers know they still need to pay their accounts.
Because your accounts are in order, and you monitor them daily, weekly and monthly, you know you need to keep a close watch on your accounts receivable turnover at all times. Once your invoice terms are edging closer to up, it might be time to step up your efforts at chasing payment to make sure your cash flow in, is higher than your outs.
While being direct and fair with your customers or suppliers is the way to go, don’t be afraid to put formal policies in place and take further action if you need to.
There are many ways to ensure your invoices are paid on time, like offering convenient payment options, or discounts for early remittances. Numerous cash advance businesses can take the sting out of long payment terms, and there are payment options for customers that offer pay-by-the-month conveniences. But be sure to understand the costs of providing these services, and know that often, the convenience comes at a price. Talk to your bookkeeper and accountant about different options for your industry and be sure to read the fine print.
4. Be on top of your stock.
Stock management is vital for cash flow. The more stock you have, the more money you have tied up just sitting on your shelves. Not enough stock and you risk losing sales while you wait for re-ordering. It’s a delicate balance, but one that is imperative to get right. COVID-19 has created an unusual time for some businesses, and stock that might have flown out the door is now sitting idle on your stockroom floor. But getting back on track should be simple – and it’s the perfect time to implement new systems to make sure you’re on top of your stock in the coming months.
Take inventory regularly and invest in stock management software that can give you real-time access to stock availability. As stock supply chain expert, Michael Wohlwend believes, “The quicker you have the information, the more valuable and pertinent your decisions are going to be—and the more agile and flexible your company will be”. By undertaking regular stock checks and working with your bookkeeper to calculate your inventory turnover ratio, you should be able to manage your stock, so it has a positive impact on your cash flow.
5. Have a financial emergency plan
Cash flow shortages are often difficult to predict, particularly when an unprecedented global economic crisis causes them. But you should always have a plan in place to access additional capital if you need it. Numerous government support packages are currently available, so check with your bookkeeper or accountant to see what assistance you are eligible for.
Noone could predict the impacts of 2020 on Australian businesses, but as the Harvard Business Review Strategy for Financial Emergencies states:
“Faced with the conflict between a “certain” plan and an uncertain and often hostile environment, the customary response is: when the unexpected happens, make a new plan. In other words, when the unknown becomes known, management assesses its impact on previous plans and creates a new “certainty” that incorporates the new information.”
You should make sure your business has a plan that includes options for adapting to the ‘new world’. For instance, how will your business run with more people working from home, how will online shopping affect your sales? It’s crucial to analyse how COVID-19 impacted your business, and understand what you need to do to recover. It is also vital to have a response prepared if there is lockdown phase 2, or global supply chains continue to be disrupted, or customers start to turn towards local made, ethically based products and services.
We can’t predict the future, but we can be prepared by keeping up to date with business trends and having a solid overview of where your business stands. In doing so, you can quickly adapt your business model and carry your success through any more uncertainty 2020 throws our way.
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