Effective cash flow management requires constant focus and organisation. Whilst your business may succeed at earning a profit, you can easily find yourself struggling to pay off necessary business costs.
Effective cash flow management requires constant focus and organisation.
Whilst your business may succeed at earning a profit, you can easily find yourself struggling to pay off necessary business costs.
Being one of the biggest reasons behind small business closures, here’s our five best tips for staying on top of cash flow.
1. Separate your accounts
Keeping your money in one bank account makes it much harder to track your available cash and where it is coming from. Business owners often look at the money in their account and assume they can spend it, not factoring the portion of that money needed for upcoming expenses.
Separating your money into a trading account, tax account and savings account is a really effective way of managing the business’ money. Not only will this ensure you have funds set aside for tax and emergencies, it will also give you accurate data to interpret the performance of your business.
Just like with your personal finances, the way you organise your business’ accounts will influence your approach to saving. If your bank balance is only $50, you will be far more inclined to reassess your non-essential spending than if there is $50,000.
Most importantly, allocating revenue to different accounts will encourage you to manage your money better.
2. Forecast and track your cash flow
One of the biggest mistakes businesses make is not having a system in place to forecast their cash flow.
This can be as simple as having a google spreadsheet that maps out all the money that will be going in and out of the business. A spreadsheet will enable you to foresee the periods when you will be short on cash and the periods when you can afford to spend.
This process will alert you before your cash flow gets tight, helping you identify unnecessary spending and implement necessary changes.
As accountants, we have monthly reviews with our clients for this very reason. Planning out your cash flow is one of the most important things you can do to maintain the financial health of your business.
3. Build a cash reserve
Just like you would with your personal finances, you should always be setting aside savings for a rainy day.
Building a cash reserve takes discipline but will protect you when unexpected events or expenses arise. Rate rises, increased supply costs or a financial crisis are just some of the reasons why your access to cash may quickly tighten.
A cash reserve will also give you the freedom to capitalise on new opportunities when they present themselves.
Note, these savings are ideally kept in a business account outside of your personal one. Business owners who mix their personal finances in with their business’ find it much harder to manage their money. Whilst it makes it difficult to measure your business’ performance, it’s also a mental challenge when you need to dip into your own savings to pay for business costs.
More than anything, having a buffer behind will give you peace of mind and the confidence to tackle the ups and downs of small business.
4. Plan your tax and superannuation payments
A common but crucial mistake is to ignore or underestimate the impact that tax has on your cash flow.
When you’re busy running a business, it’s easy to forget that a chunk of your bank balance is needed for your legal obligations.
Whilst you probably account for upcoming costs like wages and supplies, your tax liabilities and super contributions are often at the back your mind. These expenses can get large and catch out business owners out who haven’t planned for tax. Even though you may have unpaid invoices coming down the pipeline, a poorly timed tax bill might spell the end of your business.
When it comes to your cash flow, getting your timing right is everything.
Plan out your tax schedule with your accountant to make sure you stay ahead of your payments and never get caught with cash unavailable.
5. Understand the difference between cash flow and profit
It’s really important to make the distinction between profit and cash flow. Simply making a profit is not enough to guarantee the survival of a business, the timing of this money is just as important.
Essentially, profit is the money that remains after your costs are deducted from your revenue. Cashflow is the money that flows in and out of your business.
Many aspiring entrepreneurs and business owners focus solely on ‘revenue’ and ‘profit’, whilst in reality cash flow is what keeps them afloat. Profit looks good on the page but the growth of your business is determined by what cash you can access.
Outside of earning a profit, here are some other great ways you can protect your cash flow:
Staying on top of your invoicing
Tighten your terms of credit
Cash in unnecessary inventory
Reduce your outgoing expenses
Keep your books up to date
Regularly consult your accountant
Prioritising your cash flow will be a huge step towards effective money management in your small business.
To hear more about conquering your cash flow, check out our podcast episode below or subscribe to us on your podcast app.
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Elephant Advisory is an accounting and mortgage broking firm based in Melbourne, with a successful history of helping our clients achieve their goals. With a little help from us, you'll be prepared to make the right decisions for your business or property journey, avoiding many of the potential mistakes along the way.