We’ve all heard that ‘cash is king’, but for small businesses in particular, it’s an all-powerful monarch. Kim Owen-Jones, General Manager of Direct Growth at MYOB, shares why spring is the perfect time to revisit your finances and optimise cash flow.
Without control of your cash flow you risk being profitable on paper, with nothing to show for it in the bank. Small businesses often have less of a cashflow buffer than larger enterprises, and are bearing the brunt of rising interest rates and cost of living pressures, with the MYOB’s SME Performance Score for May sitting at -2.0 against the GDP1.
While it’s not always possible to control payment times from customers and clients, there are still ways to get on the front foot with cash flow. And it’s especially important in the lead-up to the festive season.
It’s never too early to start planning
Now is the time to start looking at your cash flow forecasts for the coming months.
Start with a forecast for the next three to six months and try to anticipate peak sales periods or large projects on the horizon, while also factoring in the potential slowdowns in January and February when consumer spending is often down, and many businesses are in holiday mode.
This kind of forecast will help you identify potential cash shortfalls in advance and give you time to plan for them.
Get tight on payment terms
Delayed payments are a burden on small businesses, so do what you can to defend against delays.
This might mean reviewing your accounts receivable processes to make sure you’re being paid on time – that might mean reducing payment terms from 30 days to 14 days, or incentivising early payments with discounts for loyal customers.
Don’t be afraid to be proactive in following up on overdue invoices. Accounting software that alerts you to overdue invoices and automates late payment follow-ups is a great way to streamline your payment processes.
Monitor your metrics
Getting to know your metrics and keeping a close eye on them means you’re regularly taking the pulse of your business’s financial health. Focus on your gross profit margin and operating expenses so that you understand where your money is going, where it’s coming from, and if adjustments are needed.
It’s a good practice to regularly review your operating expenses and look for areas where you can reduce costs without sacrificing the quality of your product or service. Remember to watch the smaller amounts too that can add up over time.
Manage your stock levels
If you’re a product-based business it’s important to have an accurate way to determine what amount of inventory to have on-hand to meet increased demand during the lead-up to busy times. That might include the holiday season, Black Friday sales and promotions, and the Christmas countdown.
Use historical sales data to forecast demand and balance your stock levels, so that you can avoid holding too much excess inventory. Now is also the time to negotiate favourable payment terms with your suppliers, to try and reduce upfront costs.
Financing options
If you anticipate a cash shortfall, don’t wait until the last minute to explore financing options.
Many SMEs turn to short-term business loans, invoice financing, or even business lines of credit to ensure they have the working capital needed for the busy season. Research various lending options and ensure you receive appropriate advice to find what works best for your business, and make sure the repayment terms align with your cashflow projections.
What could you automate?
Administrative tasks like invoicing, payment reminders, and stock level monitoring can be time-consuming and lead to errors that disrupt cashflow.
Financial management software can automate these processes, ensuring timely invoicing and accurate tracking of payments so that you can focus on strategic tasks and improve on overall efficiency.
The summer business slowdown
For some businesses, Christmas brings a peak in product sales, and for service-based businesses there is often an end-of-year rush as current and past clients try to complete tasks and projects before breaking for the summer.
But both service and product businesses can face a summer slowdown, so to avoid getting caught out keep some cash reserves for those slower months or set up a financial buffer to set you up for success ahead of slower times.
None of us can see the future, so taking a conservative approach to cash leaving the business, and being proactive about cash coming into the business, will ensure your business is in good stead to face any upcoming seasonal quiet periods head on.
1 Australian SME Performance Indicator
Source: Flying Solo September 2024
This article by Kim Owen-Jones is reproduced with the permission of Flying Solo – Australia’s micro business community. Find out more and join over 100K others https://www.flyingsolo.com.au/join.
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