In today's unpredictable business environment, cash flow management has become more critical than ever.
As a business owner, one of the most important strategies you can implement is a comprehensive "Cash Flow Strategy."
This should include detailed budgets for all business activities and key drivers for essential accounts like debtors, creditors, capital expenditure, inventory, work in progress, and research and development. Your plan should also incorporate cash flow forecasts and projected balance sheets.
These financial documents need to be updated and monitored (minimum) monthly, allowing for adjustments as necessary to maintain realistic and up-to-date forecasts for your business.
Effective Cash Flow Management Involves Monitoring:
Financial performance
Debtors
Work in progress
Inventory
Capital expenditure.
Why Cash Flow is King
Cash flow is the lifeblood of your business. In the current economy, it’s essential to keep a close eye on your cash flow strategy. This means paying particular attention to your debtors, stock investments, work in progress and capital expenditure.
A critical metric to track is Debtor Days Outstanding — the average time it takes to collect payments from customers — and Australia has one of the longest debtor collection periods in the world. Many business owners assume that invoices will be paid within 30 days, but this is often not the case, leading to significant cash flow difficulties.
3 Key Areas to Monitor
Debtor Management: Ensuring you have an effective system to manage and collect debts is crucial. Without it, you risk cash flow issues that could threaten the survival of your business. Don’t assume that all customers will pay on time.
Creditor Management: It's equally important to manage your payment terms with suppliers. New businesses may find that suppliers require cash in advance or on delivery, and assuming 30-day payment terms could create immediate cash flow issues.
Inventory and Capital Expenditure: Balancing the right level of inventory and planning capital expenditures carefully will prevent cash from being tied up unnecessarily.
Regular Monitoring is Essential
Cash flow management isn’t a once-a-year task. At a minimum, it should be reviewed monthly. By comparing your actual performance to your budget, you can quickly identify emerging problems that could impact your cash flow. Regular monitoring allows you to adjust your strategy and secure additional funding if needed, whether that’s through loans, raising capital or other financial resources.
By staying proactive and keeping a close eye on your cash flow, you can navigate uncertainty with confidence and keep your business on a solid financial footing.
Elevate your business to new heights. Contact Nathan McGrath on 02 6686 3000 for an obligation-free discussion on how Collins Hume can help you tailor a cash flow strategy to suit your specific requirements.
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