At StrategiQ, we are passionate about cash flow. Why? Obviously, money is our thing, but you’d be surprised how many accountants and business owners need help understanding cash flow and what it takes to keep businesses solvent and sustainable. This is incredibly important to us, and we genuinely love nothing more than seeing our clients’ businesses thrive.
First, I must disclose something important. I am NOT an accountant. Why am I writing this BLOG then? Great question. I felt compelled to write this after experiencing, for the almost 12 months I have been CEO at StrategIQ Advisory, so many business owners desperately needing cash flow support and hearing about other business accountants needing more skills to help. I am also proof you can be someone other than an accountant to manage your cash flow effectively. However, I recommend initial setup by an accountant or someone financially trained to ensure accuracy. Consulting with financial experts on strategies is also critical, particularly in managing debts or where projections indicate potential insolvency issues.
Understandably, many businesses need help managing their cash flow effectively. I have even met many accountants who say they didn’t get taught about cash flow at university and have had limited exposure to practical implementation in their careers. That’s because, typically, cash flow management sits with the owner. The owner might be the most passionate person about positive cash flow (for obvious reasons), but they aren’t always equipped with the tools and knowledge to do it well.
In my experience overseeing a company’s financial department, turning over almost $60m annually, I learned quickly that profits are nothing without positive cash flow, a watertight cash flow strategy, and a rigorous weekly reporting routine. Most need to realise that there are expenses you don’t always see in other financial reports, such as a profit and loss and balance sheet, e.g., debt and loan repayments, tax instalments, etc. We practice weekly reporting at StrategIQ Advisory, and it has been an essential strategy in supporting our current growth journey.
Cash flow is the fuel that keeps the wheels turning, the lifeblood of a business, and it enables growth and ensures financial stability. On the contrary, negative cash flow can hinder innovation, technological advances, and the ability to remain agile due to the inability to act fast – a critical requirement in today’s busy world.
Despite the current economic climate hinting that there are more positive times ahead now that inflation is finally starting to curb, the lasting impacts of the COVID-19 pandemic on the Australian business landscape are very apparent. Many businesses are still struggling to stay afloat. While government support provided a lifeline during the pandemic, it also came with the inevitable day of repayment. Now, businesses are facing the reality of mounting ATO debts. This is new territory for many. However, while the situation may seem daunting, proactive planning is the key to overcoming this hurdle and ensuring the sustainability of your business.
So rest assured, these tips are practical, easy to implement, and can help all business owners – with businesses thriving and with businesses carrying large debts. Cash flow isn’t a one-off practice and shouldn’t stop when your business turns into a favourable equity position. It must become a habit with continued targets and investment strategies for ultimate wealth, sustainability and success.
Here are my top tips and advice for effective cash flow management:
- Streamline accounts receivable and invoice efficiently: Look at every aspect of your invoicing and accounts receivable process. First, ensure you are invoicing regularly – as regularly as possible and acceptable within your industry. Ideally, invoicing should occur weekly. Then look at your payment terms – don’t allow customers lengthy periods to pay. They often forget or wait until the end of the term to pay (see accounts payable strategy below). Ideally, request payment within seven calendar days, 14 days maximum. Understandably, some industries cannot do this but keep it as tight as possible. Also, identify techniques to speed up customer payments, such as offering discounts for early payments, implementing clear invoicing and payment terms, and utilising automated reminders.
- Fast-track collections and implement a solid debtors process: All initial payment reminders should be automated to save time and money on human resources. However, a human should have a weekly recurring time slot in their calendar for debtors, including investigating why customers aren’t paying – is there an issue with the product or service? Are they experiencing financial hardship and thus require a payment plan? Maybe they aren’t receiving the emails? For many reasons, invoices remain unpaid, so investigation and problem-solving are critical. Admin and accounts staff should have transparent processes on when to escalate overdue invoices or complaints to higher-level managers or owners, and these should remain monitored and non-negotiable. Reporting on debtors should be a weekly process for all business owners. If all else fails during the investigation and negotiation process, ensure you have templates for final warnings before sending unpaid debts to a debt collector. Sometimes, a well-worded warning is as effective as outsourcing debt collection.
- Accounts payable scheduling: Similarly to the above, schedule your accounts payable so that you pay them towards the end of their due date, not on their receipt. Explore opportunities to negotiate better payment terms with your suppliers where needed to fit within cash flow periods, such as extended payment periods or discounts for early payments. Building solid relationships with suppliers can lead to mutually beneficial arrangements. You could also utilise a valuable credit facility that generates points when you use it to pay your suppliers (e.g. flights, holidays, etc.), but be sure to schedule your repayments to avoid getting hit by the interest.
- Renegotiate debt: Contact the ATO early (or have your accountant do this on your behalf) and explain your situation. The ATO are willing to negotiate payment plans so long as you can assure them how and when you will make repayments then ensure you stick to it. The ATO become less tolerant of businesses with a history of payment plans that continue to default. Professional assistance for negotiating favourable terms and a solid plan for how to treat future BAS and tax return lodgements is always recommended.
- Inventory control: Avoid tying up excess capital in slow-moving or obsolete inventory. Implement strict inventory management techniques like just-in-time ordering, regular stock reviews, and liquidation of obsolete stock to optimise cash flow.
- Wages and superannuation payments: Match your wages and superannuation payment schedules with the needs of your business. Most businesses pay their staff weekly or fortnightly, but some still pay monthly. Monthly can be a real challenge for people, though, so I would only recommend this if completely necessary. However, most employees don’t mind quarterly superannuation payments, so if this is better for cash flow, then extend it. Similarly, a large amount going out of the business can be challenging to manage, so some companies may be better off paying these more frequently in smaller increments – it depends on how the cash cycle works for each business. Just ensure you always meet the legislated deadlines.
- Tighten expenses: This is common as it is also connected with profits. However, sometimes, seeing the expense figures in a cash flow report can shine a light on how much you are spending unnecessarily – so long as your cash flow reporting is set up correctly. Every business should continually undertake the exercise of identifying areas where costs can be cut without compromising quality. This could be as simple as negotiating better deals with vendors, eliminating unnecessary subscriptions or services, or optimising energy usage.
- Cash reserves: Set aside a certain amount of profits each month into a separate cash reserve account. Don’t touch it for any day-to-day business expenses or activities. It should be a safety net in case of unexpected events or cash flow emergencies. You never want your business to be in a position where it cannot make payroll – this will be incredibly damaging to your company and reputation.
- Review your pricing: If you are continually struggling to find your way to positive cash flow and have tried the above strategies, you need to turn to pricing and increasing revenue. There are many ways to analyse pricing, but simply speaking, break down all your services or products and compare line by line what you charge versus your cost of sales (gross profit) and determine the multiplier for each. A times three multiplier should be what you are looking forward to. But if you see anything at break-even or worse, below, then that’s where you need to pay urgent attention.
- Reporting and budgeting: Always know your cash flow, historical trends, current balances and projections. It is critical that your reporting is updated and current weekly, but maximum monthly. It must be continually sense-checked for accuracy by reviewing revenue and expense lines and comparing them to the bank to ensure everything has been noticed. Whatever reporting option you use, you must be able to play with the data to plan scenarios, e.g., what hiring another staff member in July would look like – in July, August, September, and October. Sometimes, a business can hold up additional costs in one period but quickly run into problems in the coming months when there might be a downturn in cash. Budgeting out cash flow is an excellent way of achieving goals, as in real-time, you can see just how quickly the changes you make in the business can positively impact your cash flow. Often, this can be hidden within a P&L.
Cash flow is a beast, but there is nothing more important in business than effective cash flow management if you are to survive long-term. The most important aspect of the above is linking all the pieces together and creating strong documented habits. Once you have meeting rhythms and reporting setup, you will see how in control and ahead of the game you can be.
If you need our help with any of the above or want to talk more about cash flow reporting, contact us today.