Get savvy in 2015: Cash flow tips for small businesses

Posted on 12 January, 2015

Small to medium-sized businesses can drown in paperwork. At times it’s tough to stay on top of matters and get the most out of your business. Here are some cash flow tips to help you ramp up efficiency through strength in numbers. With the New Year only just behind us there’s no better time to think ‘cash flow’ for 2015.

Have you prepared a cash flow?

Most businesses have busier times and quieter times. To help manage this, prepare a cash flow so you can predict the impact that the quiet times have on your cash in the bank. Start by preparing an income and expenses budget and incorporating the capital purchases and repayments you expect in the next 12 months. Capital purchases are items or assets you need to conduct business such as equipment, machinery or computers. These items, which can cost a fair bit, are usually used in your business for more than a year and cannot necessarily be easily converted into quick cash.

Cash flow information is useful in many ways. You can use it to prepare marketing campaigns and special offers that will boost revenue when sales are slow.  It shows peaks and troughs and helps you and your bank establish the most appropriate level of financial assistance you may need. It also builds confidence by showing your financial institution that you operate a professional business.

Are you managing your cash flow?

Managing cash flow is crucial. Key is how quickly you collect the money you’re owed so you’re in the strongest position to pay your bills. Aim to collect money from your debtors faster than you pay your creditors. This sounds simple and logical but many businesses don’t get this right and quickly find themselves in a deep hole. Stress levels build as the situation gets worse.

How are you chasing debtors?

Collecting debtors is never fun. Always agree to your payment terms in writing and refer to them when chasing debts. Payment terms vary depending on the nature of your business. They can be cash on delivery, 7 days, 14 days, 30 days or more. If a client does not pay on time, call them the next day and refer to your agreement.

Don’t have time to track when to call a debtor? Several automated debtor management tools on the market can help. These can be set up to send text messages, email, prompt you to make a phone call and even refer the matter to a solicitor to write a letter of demand. Another option is to use your bookkeeping service as an outsourced provider for chasing debts.

Spending your GST funds?

Always remember that the GST you collect is not yours to spend. You are effectively holding it in safe keeping on behalf of the Australian Taxation Office (ATO). Businesses that use GST to pay other bills can quickly get into trouble and not have enough to pay their Business Activity Statement (BAS).

Avoid this by setting aside an amount for GST each fortnight or month (depending on how big your turnover is). Estimate the amount of GST you might need to pay by completing a budget and incorporating these amounts into your cash flow.

Here’s a simple illustration:

Sales                $100 plus GST = $10

Wages              $40

Expenses         $40 plus GST = $4

Profit               $20

The amount of GST you need to send to the ATO is $6 ($10 from sales less $4 from expenses). So with this example, for each $100 you earn you should set aside $6 to pay your GST obligations.

Have old stock on hand?

This is a ‘no-no’ for cash flow. Make sure you don’t keep old or obsolete stock. Regularly clear old stock and free up cash.

Managing your supplier relationships?

It’s important to maintain healthy relationships with your suppliers. Paying your accounts on time is a big help and ensures consistent supply to your business. If needed, try to negotiate with your suppliers for extended terms so you can collect debts before paying them. This is another way to manage cash flow to your advantage.

Successful Alliances is an award-winning consulting and bookkeeping practice specialising in helping small to medium-sized businesses and not-for-profit organisations maximise funding while maintaining financial integrity. To discuss how to make every cent count, call Director Karen Groves and see how best Successful Alliances can help.

The essentials

Successful Alliances
Where: 2A, 18 Napier Close Deakin
Phone: (02) 6287 2288
Web: www.successfulalliances.com.au or Find them on Facebook.

Feature image of blank list with Australian money and calculator courtesy of Shutterstock.