Spend time on the things that matter most so you can trade more profitably and enjoy the lifestyle you set out to achieve in the first place.
The best way to describe the importance of cash flow in your business is comparing it to your heart pumping blood to keep you alive and well or the engine that keeps your car running.
I’m not sure who exactly coined the phrase: “cash is king!” but there is unanimous agreement amongst businesses of all shapes and sizes that adequate cash flow management can either make or break you – it’s that black and white.
What astounds me most is that many small businesses still struggle to differentiate between cash flow and profitability and seem to just shove it into the overarching financial management cupboard. Again, unless you have a finance background, having a solid accountant or virtual CFO on your team is probably non-negotiable.
Understanding the basic difference between accrual and cash accounting and knowing how the timing around money flow impacts your business, is something you should be well aware of as a small business owner.
Here are some ideas to discuss with your accountant and have more meaningful interactions beyond producing financial reports and completing end of year tax returns:
WORKING CAPITAL CYCLE
Your financial statements provide a treasure trove of information on how your business is performing. Why not utilise some of this data to quickly work out how effectively you are managing your working capital requirements.
Calculating some simple ratios such as debtor days, creditor days and inventory turnover days can help identify potential timing issues in your working capital cycle. Use these numbers to guide you in putting systems in place to improve efficiencies and mitigate risk.
FINANCIAL DISCIPLINE
Managing cash flow requires discipline, no bones about it. There is no better way to hold yourself accountable for good financial management then to prepare a cash flow forecast.
It doesn’t have to be complicated, a simple spreadsheet or even pen and paper will suffice – just do it! Once you have put in the effort to do one, make sure you follow up regularly, revise and update as you go. This will not only help you plan ahead but will also give you visibility of your cash runway and train your mind to think carefully before you spend.
STRUCTURED PAYMENTS
As you have gathered by now, cash flow is all about timing. With the continuous enhancements in financial services products and other payment technologies, it may be worth having a conversation with lenders or suppliers to provide greater repayment flexibility that suits your cash flow.
A great example of this is could be to reduce repayment amounts during those quieter months and then increase them appropriately during busier periods. Aligning cash inflows with outflows is a smart way to reduce unnecessary stress.
Find out more at www.orizonconsulting.com.au
