“We were always focused on our profit and loss statement. But cash flow was not a regularly discussed topic,’ explained Michael Dell when asked about his early experience as founder of Dell Technologies. “It was as if we were driving along, watching only the speedometer, when in fact we were running out of gas.”
It’s common for business owners to focus on profit and loss statements at the expense of monitoring the cash flow. And this can have disastrous consequences. A recent report into corporate insolvencies by the Australian Securities and Investments Commission (ASIC) found that 44 per cent of businesses fail because of inadequate cash flow or high cash use.
You should aim to have stable, reliable cash flow. It’s vital – in fact, your business’ viability depends on it – you keep an eye on all your costs and make sure you’re always taking steps to keep them down.
It’s also important to keep track of all the money flowing in and out of you business over a set period of time – a cash flow statement is a valuable tool for doing this. For a cash flow template and a more detailed breakdown of what to include, the Department of Industry, Innovation and Science’s website is an excellent resource.
Here are some ideas on how to keep you costs down:
Monitor stock levels constantly so you can replace slow-moving stock with products that have a faster turnover. Square’s free inventory management system allows you to download reports on your current inventory levels, which is invaluable. You also receive a daily stock alert email detailing the items that are low or out, so you always know what stock you have on hand and what you need to order.
It’s important you find suppliers who will only provide stock when you need it, rather than filling regular orders regardless of your sale figures. This will ensure you minimise waste. The last thing you want is perishable stock sitting in your storeroom when you already have the quantities you need. Also, make full use of your suppliers’ terms of trade – these essentially work like interest free loans.
Point of Sale
Your POS system helps you keep track of your day-to-day sales and expenses. Used effectively, POS can save you time and provide you with important insights into your business operations. Square’s POS software is free to use – there are no setup or monthly fees. You only pay when you take a payment. And unlike other payment processors, when you take a payment with Square you get the money in your bank account as soon as the next business day.
Review your costs regularly and use accounting software to create profit and loss reports. Xero or QuickBooks Online are two cloud-based accounting platforms that integrate with Square. Your accountant or financial advisor should also be able to help you interpret these reports and make decisions based on what they’re telling you.
There are a number of factors when it comes to determining pricing, but having cash flow targets can help guide your decision-making. If your business is having cash flow problems, one possible reason could be low profit margins. Many business owners decide to lower prices in order to remedy this, but this strategy is not without it risks. While it may allow you to make more sales in the short-term, you may risk damaging your brand.
Many small businesses run into cash flow problems because of unforeseen circumstances. There might be a problem that that you haven’t budgeted for or additional expenses you haven’t factored into your business plan. Keep an eye on the market and broader economic conditions. Prepare cash flow projections, work out your break even point and always have plans in place in the event that something unforeseen happens and your cash flow drops.
Having effective processes in place can help you stay on top of money coming in and flowing out of your business. Take full advantage of the technology designed to help you manage different parts of your business. For example, e-invoicing (also known as online invoicing) with software such as Square Invoices enables you to send invoices directly from your computer or point-of-sale app. You can then monitor the payment status so you can always see what’s outstanding — an essential part of cash flow management.
Be creative about ways to save money; for example, some business transactions could be processed for bartered goods or services where both parties can benefit. Weighing the benefits of accepting alternate payment methods — such as credit cards — may also enable your debtors to settle outstanding bills faster.