What You Need to Know about Small Business Cash Flow

So what is the ACHILLES HEEL of Small Business?

1. No…it’s not the lack of planning
2. No…it’s not the lack of leadership
3. No… it not even the lack of profits

1. Suppliers are not paid on time.
2. The business is stretching itself to pay the employee’s wages and superannuation.
3. The business has outstanding tax debts and / or are organising payment plan arrangements with government authorities.
4. The business is consistently accessing their overdraft facility.
5. The business is paying late payment fees.

You may miss out on opportunities. Have you realised how sales consultants and managers try to close deals by end of the month. This is to achieve their sales targets. If you are in a strong cash flow position, you may take advantage of these opportunities to purchase at a discount.

Through cash flow issues, you may not be able to have the latest and greatest (e.g equipment). And if your competitor doesn’t have the same issue, then they may be able to increase their sales and / or increase their efficiency.

The growth of your business is hindered as you do not have the cash flow to invest in other areas of the business such as marketing, which could impact increasing your customer base.

And then there is the personal feeling of disappointment and failure of yourself and your loved ones as you are unable to be the provider that you wanted to be, leaving you frustrated. Ultimately if situations worsen it can lead to financial distress, and marriage breakdowns.

I have asked a large number of business owners the question of ‘How are you going to fix your cash flow?’ Almost all business owners tell me that the way to get out of it is to “get more sales” But is it?

Although increasing sales may be a solution but for others pushing more sales could worsen the situation (pending your business model).

What do you have to do to get more sales…

1. Need more stock / inventory
2. Need more staff
3. Need more marketing….just to name a few.

So, you have a bunch of expenses that you pay for now with potential future sales. Note that the sales invoices will not be paid until a much later point in time…1 month, 2 months even 6 or more months down the track. Before you know it, thinking that sale

How many times have you been trapped by people’s misconceptions? They promise the world giving you hope but they do not deliver. This is very prominent with cash flow in your business where you could get the same feeling.

A common practice is when business owners start borrowing expensive money. What I mean by this is that they start borrowing or using other people's money with high interest rate. Such as overusing their credit card and pay massive amount of interest (15%, 20% or even worse).

Business owners may use financiers with exorbitant fees and interest charges. These financiers will provide a short-term loan (generally less than a year), and the repayments when broken down weekly or monthly at first don’t seem frightening but when these are calculated over the borrowing period, you will notice that the rate is excessive. Worst of all, you will not fix the cash flow issue and when you reach close to the term of the loan, the financier may offer you another short-term loan, hence ‘THE CASH FLOW TRAP’ as you cannot get out of this situation. You plummet into a DOWNWARD SPIRAL. 

There are ample ways to improve a business’ cash flow, some of which will have an immediate impact, others designed for over the longer term. Below are 5 quick tips which would start putting you on the right path.

1. Ensure that you are using the appropriate BAS method
   There are two options when reporting your BAS. ‘Cash Basis’ and ‘Accrual Basis’. On a ‘Cash Basis’ you report the GST when the money is paid and received. Rather on an ‘Accrual Basis’ you report the GST when the invoice is raised and does not take into consideration the physical cash movement. If you are not on the correct BAS method, you could be worsening your cash flow position as you are paying for GST on supplies when the alternative method may provide greater benefits OR not claiming for GST on purchases until a later point in time.
   
   
2. Extend the payment terms with your suppliers and reduce the trading terms with your customers.
   If you are negotiating trading terms with your supplier, you should try to have extended trading terms such as 30 days or even longer. On the contrary try to offer smaller trading terms on your sales invoices. The difference between the two will create a more positive cash flow for you.
   
   
3. Have a rolling 90-day forecast.
   This is a great planning tool as you will be able to see the invoices and payments that will come in and out of the business for the next 90 days. Through this planning tool you will be able to determine when you will have a cash shortfall. By having the foresight, you can take actions to ensure that it doesn’t occur.
   
   
4. Reduce any unnecessary overheads / expenses within the business
   Removing any wastage from the business is the best way to improve not only your cash flow but also your bottom line. Therefore, any expenses in the business which are not necessary should be eliminated.
   
   
5. Consultation with a finance broker and other finance professionals
   Liaising with a trusted finance professional could find immediate savings in your business and / or restructure your current processes to ensure that your business’ cash flow will improve. Ensuring you have a trusted finance broker will safeguard that if any outside funding is required, that you will have the right product that suits your purpose. These trusted professionals working together will provide you with the best outcome as they focus on your business from a holistic perspective rather than having a band-aid solution.