Four aspects of cash flow management to help your small business stay liquid

Cash flow management is a careful balancing act with many nuances, and the particular challenges can vary greatly business to business. Small businesses may find themselves strapped for cash for various, and sometimes unavoidable, reasons — particularly in these turbulent COVID-disrupted times.

While there is no one-size-fits-all solution, here are a few fundamental tips that can help improve your cash flow management and help your small business stay liquid, which is important now more than ever.

Creditor Management

Handling suppliers is not for the faint of heart: everyone has that overeager creditor who is perpetually bringing up your outstanding balance, even before it’s due. Small business owners should be able to answer three important questions about all their suppliers:

What are the terms and conditions of the arrangement?
What is the level of rapport that you have with the supplier?
How critical is their product/service to your business?

If you can answer the above questions, you will be able to deal more efficiently with trade creditors when using the following techniques:

Only make payment when it is due – This may sound simple, but many people like to immediately pay their suppliers to avoid liability. If the terms and conditions of your contract allow it, business owners should take advantage of longer payment terms, which will free up working capital to be used in other areas of the business.
Check products before paying for them – Have you already received the materials, goods or services? Was the quality up to the agreed standard? Was the price charged in accordance with the purchasing agreement? If you answer ‘no’ to any of these questions, then it may be reasonable to hold off on paying the supplier while any issues are resolved.
Speak with the creditor – If you are genuinely having difficulty with paying in accordance with the terms, communicating this with the supplier is important. Ignoring it won’t make it go away. Instead, try to provide the supplier with a reasonable payment timeframe and request for an extension. Such a request will depend heavily on your level of rapport with the supplier — if you have a history of constant late payments, they may not even consider an extension.

Debtor Management

The other portion of the working capital equation is accounts receivable. Every business experiences that one (hopefully just one!) client who takes delivery of your products or services… and is never heard from again. It is important to take precautions to avoid unpaid bills. Like with creditors, it is essential to consider the terms you have agreed to, your relationship with the client, and how important their business is to you.

When dealing with debtors there are several methods you can employ to improve your working capital situation:

Make invoicing clear – Ensure that the invoice you send to your client is complete and accurate. Highlighting the due date, balance due, and payment methods available will make it easier for the client to process payment.
Establish a credit policy – Before you even engage with a customer, ensure that you screen them and that you check their credit references if possible. This preventative measure will lower the risk of having to deal with late or non-payment in the future. Should you decide to go ahead with the client, establish clear credit terms and let them know of any penalties that may apply if payment is overdue.
Accounts receivable factoring – A last resort method which involves selling the debtor ledger to a “factoring company”. These companies buy the liability from you at a discounted price, and then chase up the debt with the customer. Using this method would undoubtedly damage your relationship with the customer, so use it cautiously only after considering the circumstances of the customer’s inability to pay.

Inventory Management

Businesses that provide products (as opposed to services) can improve their cash flow by ensuring they have the right level of inventory on hand at all times. Like many other business decisions, inventory management is a careful balancing act. Being overstocked means you’ve unnecessarily tied up working capital that could have been used in other parts of the business. On the other hand, being understocked could mean disappointed customers and lost sales.

Planning inventory levels based on environmental factors such as the seasonality of your business, the state of the economy, and government policies can be challenging, but it is generally a good idea to know when you will need to order things to ensure you have enough for sale (the reorder point). For example, it would make sense for a fishmonger to stock up on prawns during the Christmas season, and keep less stock during winter.

Government Grants and Assistance Programs

Lastly, always keep an eye out for grants and assistance programs by the government. During the recent June 2021 Covid-19 outbreak, both the NSW and Victorian governments have released programs to help small and medium-sized businesses manage their cash flow during this period of extended lockdown.

Please contact us if you have any queries regarding this or require assistance with lodging an application.

IMPORTANT NOTICE

This blog post contains general information only and has been prepared by Allworths without reference to your objectives, financial situation or needs. Allworths cannot guarantee the accuracy, completeness or timeliness of the information contained here. By making this information available to you, we are not providing professional advice or recommendations. Before acting on any of the information contained here, you should seek professional advice.