IS CASH FLOW A STRUGGLE?

Do you find that your business’ cash flow is always inconsistent, lumpy and unreliable? If so, it may be because you don’t have the systems in place to manage cash flow effectively and efficiently.

What are some of the reasons for poor cash flow?

  • Seasonality – if you sell ice cream, you might be very quiet in the cooler months and therefore, the bulk of your revenue is likely to be made in the warmer months. As such, paying bills or upgrading equipment may be more of a struggle in your off-season;
  • Gap in your Working Capital Cycle – this may occur when your customers pay you later than when your suppliers expect you to pay them. For example, you give your customers 60 days to pay, but your suppliers expect you to pay in 30 days. This gap in your working capital cycle will obviously pose some cash flow issues because you are not converting your stock into cash in time for when your bills fall due;
  • Wrong loan types – if you have been given the wrong type of loan, then this could cause unnecessary stress on your cash flow as the repayment arrangement for that loan may not suit the intended purpose. For example, you may not benefit from purchasing a forklift via an overdraft facility, because an overdraft is designed to be fully fluctuating. Instead, a forklift should really be purchased via an asset finance loan or a short-term cash flow loan so that the forklift is paid off within a specified period of time. Overdrafts do not generally require any principal reductions, so you may end up paying much more interest than you need to (if you are not paying any principal off), and potentially choking up your overdraft if it becomes hardcore.

So, what can you do to manage your cash flow better? Here are some tips that may assist you:

  • Prepare a Cash Flow Forecast – this can be an effective tool which combines your historical and current data, with some key assumptions and helps to forecast your business’ income over a specific period of time. When done properly, it can give you a fair idea of what your cash inflows and outflows (and subsequent net cash position) may look like on a monthly basis over the forecasted period. It may also help you to identify some seasonality in your business, which can often be the reason for inconsistent cash flow;
  • Look into utilising a cloud based accounting system with bank feeds – many accounting software packages are now cloud based and have the ability to link up with your business’ bank accounts so that the software can pull real time account balances and transactions. This is important because it shows you exactly what is happening in your accounts on a day to day basis and often you can generate reports automatically which helps to save time and makes forecasting easier;
  • Payables & Receivables management – try to ensure your customers are paying you well before your suppliers need to be paid.
  • Consider financing large expenditure outlays – as the old adage goes ‘Cash is King’, so sometimes it makes sense to finance large one-off purchases and/or upgrades such as vehicles, plant & equipment, bulk stock orders or even maintenance expenses. This can help to preserve cash for day to day working capital requirements or just as a safety net for that rainy day.

If you have any cash flow concerns and feel you may need some finance assistance to overcome them, contact us now to discuss your options before your concerns become actual problems.

Disclaimer: The information provided herein is for general information purposes only and does not constitute specific advice. It should not be relied upon for the purposes of entering into any legal or financial commitments. Specific advice should be obtained from a suitably qualified professional before adopting any investment/financial strategy.