The GFC and post-G FC era has, and will continue to claim victims. Most business owners accept the risk of failure as part of the 'game' but that knowledge doesn't ease the pain, suffering and stress when it actually happens. Unfortunately business failure can also have a domino effect and lead to relationship breakdowns,divorce, extreme financial hardship and division of families.
In many cases, the failure is a direct result of poor decision making or a lack of capital. Poor service, inferior products, small margins and high debt can all be business killers but the most common cause of business failure is inadequate cash flow. When the economy deteriorates, the business does not have the reserves to see through the tough times and when the banks lose confidence in the business the outcome is inevitable.
Banks certainly have their own issues to deal with at these times, but the inevitable consequence of a credit squeeze is that they will call in debt where they fear a deteriorating position. Banks often appear to lack the patience and foresight to see a business through a tough period but significant damage is done to the economy when a business is closed and its capital value and intellectual property is extinguished.
Make no mistake, poor cash flow can even bring a profitable business to its knees. Cash flow is not just a means of keeping a business afloat, it is also the foundation of your future growth plans.
With the Christmas trading season upon us here are 6 tips to improve your business cash flow.
1. Plan and Forecast Now
This is probably the most important part of managing your cash flow. You need to understand your businesses cash flow cycle and prepare a cash flow forecast that takes into account your best and worst case scenarios. This process is designed to establish if you have sufficient cash reserves to get you through the troughs and identify when and how much additional funding is required. They say, "forewarned is forearmed" and there is no point running to the bank when your overdraft is about to hit the limit. If your cash flow forecast identifies the need for additional funds, contact your financiers now because finance applications are viewed more favourably when they are lodged before you run out of cash. If you don't get a positive response from your existing financier, look elsewhere.
2. Debt Collection
In some cases your customers or clients are using you to fund their business (interest free) while you're possibly paying interest on your overdraft. Clearly outline your terms of trade from the outset to avoid any mis-understanding when you have to chase any outstanding debts. A clear system and process is required where customers stretch your trading terms and never extend credit to customers with a poor credit history.
3. Inventory Management
Remember, your stock is really your money tied up on your shelves. There is a fine line between having enough stock and having enough working capital to meet your ongoing financial obligations. Often, 80%of sales come from 20% of business' product line so knowing what stock items and what level of stock to carry is a vital management issue. Run down the level of slow moving stock in favour of your best selling items and consider a clearance sale to move some of your slow moving items to free up some cash.
4. Equipment Purchases
Where you need to acquire new equipment or capital items consider financing the equipment by lease or chattel mortgage rather than purchasing the item with your available cash reserves. This may have an impact on your profitability but it will free up cash that would otherwise be tied up in plant and equipment or motor vehicles. Most importantly, consult with us first regarding the finance options so you also understand the taxation and cash flow consequences.
5. Monthly not Annually
By simply rearranging annual payments for items like insurance into smaller monthly payments you can take the pressure off your cash flow. Sure, you might pay a small premium for the adjustment but you don't need to worry about paying lump sums during your slower months. If your insurer doesn't offer monthly payments you might need to shop around.
6. Use Surplus Cash
Understand your cash flow cycle so that short term cash surpluses are not seen as 'excess cash'.Where required, isolate these funds to support future cash requirements. Ideally, place the funds in an interest bearing account, an offset account or your overdraft that you can re-draw at a later period. Understanding your cash flow cycle and then implementing a cash management system can be critical. Cash is the lifeblood of your business and planning can mea n the d iff erence between just surviving a nd potentially thriving. Strategic business planning can prevent business failures and if you need any help with your cash flow projections or if you are looking to fund new plant and equipment call our office on 07 5482 2855 today.