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5 Steps on How To Manage your Cash Flow

5 Steps on How to Manage your Cash Flow

When you ask any SME owner/operator what the biggest issue they face is, you will most likely get a reply along the lines of ‘Cash-flow is a pain!’


Start-ups are often so focused on receiving funding, getting their name out there and making sales that they think the money will just flow in and everything will work out once they sell the first few units of what they have on offer. What most people fail to understand is that being acknowledged by the market is just the first turn of the wheel, subsequent motion won’t happen without well managed processes and controls. Obviously the process I want to write about today is cash-flow management.


Having a well thought out and structured plan on cash-flow management is almost as vital as marketing your product and making sales. If you do not have well outlined rules in place, you are bound to get taken for a ride by those you supply. Of course you don’t have to worry about just the accounts receivable, the accounts payable is going to need to be well managed too. Your payments need to be timed and measured so that you yourself do not become an unreliable customer and employer.


Here are my 5 focus points for cash flow management;


1. Review your past cash-flows and break them down into their monthly periods. If you have been operating for 3+ years you may be able to discern a pattern between months. Achieving this allows you to forecast what may happen in the coming months – and allow you to create a plan to smooth out any bumps. Consistent, predictable cash flow is your friend.


2. Assess your systems and processes. Many SME’s have a poor process in regards to invoicing, storing data, reviewing invoices sent by suppliers and tracking receivables!


It is important to be on top of all of these things otherwise you are just asking to be paid late, miss receivables and not be able to assess your monthly cash-flows accurately.


3. Attempt to get your receivables in earlier and your payables out later. Manage the relationship with your debtors, make sure you know what their business is about, set your credit plan at the beginning of your relationship, if an existing client is not abiding by your current arrangement then request to sit down and create a new credit plan, offer payment plans to those that are consistently late (better to have some cash than none at any stage). Lastly if customers do default on their payments, chase the debt early or risk receiving nothing.


In terms of accounts payable, I’m not saying that you should be a debtor that you would not want to deal with yourself. You should however try and extend your creditors arrangements as much as possible, especially if they are a large company. That being said, always make your payments within your credit plan so that you may use this as leverage if you hit a tough month or two.


4. Manage the relationship with your bank well. I’ve talked a lot about accounts payable in terms of other businesses, however the bank is your most important creditor. Being transparent with the bank in your plan and during the execution can be what saves you from going under. If they see that you have your cash flow forecasts and business plan in order, they’re much more likely to allow an extended payment or, if you have an overdraft account, increase how much you can overdraft. You should always communicate with your bank how on track you are to make payments as they do not enjoy being surprised with late payments/defaults.


5. Lastly, you need to make it a quick and easy process for customers to pay you. Using cheques is outdated and a waste of time in this day and age. Allow for payments by Eftpos and credit cards; state your account numbers on the invoices.


I don’t believe I can stress enough how important cash flow management is, and due to it being done poorly, many great and profitable businesses close their doors. This post is for those owners that are still caught in the cycle of managing their own finances, but really you should look to hiring a financial advisor. Cash flow management is second nature to those in the know and can leave you to seriously work on improving growth within your business.


CFOs at the CFO Centre are highly experienced in cash-flow management and are dedicated to helping ambitious businesses meet their strategic objectives. Contact the CFO Centre on 1300 447 740.

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