Managing your business cash flow
- Cash Flow
- Managing a Business
- Starting a Business
When managing your business cash flow, ask yourself: Does profit in business equate to successful cash flow management?
The answer – not necessarily.
Experienced accountants deem successful cash flow management is achieved through a keen focus on “the main drivers of both positive and negative cash flow.”
What is Cash Flow?
Cash flow refers to the movement of funds in and out of your business. Positive cash flow occurs when the amount of money you are taking in is more than the cash leaving your business.
Alternatively, negative cash flow occurs when you are spending more than your business is taking in.
Five Tips on Managing Cash Flow
Here are our top five tips on managing cash flow for your business in 2022:
1. Review last year’s finances
The key to managing cash flow is to understand your seasons. Reviewing your finances from the previous year will show you where the peaks and troughs are in your business.
Once you have a firm understanding of where you stood “this time last year” (and considering external factors during that time such as mandatory lockdowns due to Covid 19), you can plan for the slower times – knowing that the peak may have just been or is on its way.
2. Manage the variables
When cash flow is tight, it’s the variable expenses that can take the hit to keep more money in the pocket of your business.
Variable expenses include:
- Inventory: Review the previous year and order accordingly.
- Employee wages: Over – and under – staffing results in loss of profits so review last year’s finances and understand when extra staff are needed – especially in the retail and hospitality sectors.
- Equipment: Have funds set aside for equipment should it brake or falter. This is often unknown so plan for the unexpected.
3. Establish a line of credit
Establish that line of credit when business is booming and build trusting relationships so that they will be there for you when and if you need them.
Establishing a line of credit for your business can serve as a lifeline during tough times.
Keep in mind the credit line should be established with lenders or vendors during the peaks of your business – not when you are already knee deep in a cash flow crisis. Lenders may be hesitant to extend a credit to a business in a seemingly desperate situation.
4. Maximize Cash Inflows
Businesses are always looking for ways to maximize cash inflows, and it is especially handy when cash flow fluctuations are an issue.
Maximise cash inflows by requiring a deposit before services start (or products are ordered). If your business provides subscription-based services, payment up front or in multiple installments can help maximize cash inflow.
Also, don’t be afraid to put your cash to work by keeping balances in higher interest earning accounts. These accounts often require a minimum balance, so talk to your bank or accountant to find out the best options when investing your cash.
5. Talk to an Accountant
Managing cash flow is important, so having an experienced accountant guide this process is essential. Even if you are financially savvy, an accountant ensures that your business finances are in order, helping to create positive cash flow in your business throughout the year.
Interested in hearing more? Book your obligation free chat with the experienced team at Elevate Accounting HERE or call us today (08) 9460 1040.