Managing cashflow effectively is crucial for the sustainability and growth of any business. A healthy cash flow ensures that your business can meet its obligations and invest in opportunities. Here are seven practical tips to help maintain a robust cash flow in your business.
Doing a Budget
Creating a detailed budget is the first step towards a healthy cash flow. A budget acts as a financial roadmap, allowing you to foresee future cash needs and manage funds accordingly. It helps in setting financial targets and benchmarks which, when monitored regularly, can prevent cash flow crises.
Reviewing the Budget Against Actuals
It’s not enough to just have a budget; regular comparison between budgeted and actual figures is essential. This practice helps you identify where you're spending more or less than expected. Adjusting your budget in response to these variances can improve cash management and prevent financial overruns.
Overestimating Expenses
When it comes to managing cash flow, it’s safer to overestimate your expenses rather than underestimate them. This approach provides a buffer for unexpected costs, ensuring that you’re not caught off guard. An overestimated expense budget helps in maintaining a positive cash flow even in months when actual expenses exceed planned ones.
Knowing the Business's Sales Cycle
Understanding your business’s sales cycle is critical in forecasting high and low cash flow periods and allows for better financial planning. For instance, if you have a seasonal business, you can plan ahead for the off-peak months by saving more during the peak sales periods. This knowledge enables you to align expenses with the expected cash inflows.
Getting on Top of Debtors
Effective debtor management ensures that cash owed to the business is received on time. Implement policies such as offering early payment discounts or setting clear credit terms to accelerate cash inflows. Regularly follow up with debtors before due dates to remind them of pending payments and to keep your cash flow uninterrupted.
Understanding Business vs Personal Expenses
Keeping personal and business expenses separate is vital for accurate cash flow analysis. This separation helps in understanding the true financial performance of your business and prevents personal expenses from depleting your business funds, which can adversely affect your cash flow.
Not Using GST, PAYG Withholding, and Super to Fund Your Business
It’s tempting to use funds like GST, PAYG withholding, or superannuation contributions to manage short-term cash flow issues. However, this practice is risky and can lead to significant financial problems. These funds are not business revenue and should be strictly set aside to meet your tax and super obligations.
Implementing these seven cash flow management tips can significantly enhance the financial health of your business. By preparing for the unexpected, understanding your financial cycle, and keeping a strict separation between company and personal finances, you can build a strong foundation for your business's future growth. Start today to see the benefits in your cash flow tomorrow.
If you find yourself in a place where you are not sure how to get on tops of things when your business finds itself in cashflow trouble, book in a free discovery call with us here
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