Cash flow is one of the most important things to get right when operating a successful business. A healthy cash flow means you can pay your bills on time, meet your market demand and even invest in growing your brand. Here we outline what cash flow is and how to manage it.
What is cash flow?
Cash flow measures your ability to generate cash over a specific period. Improving your cash flow means you’re well placed to cover your operating costs, hefty expenses or cash surpluses. Managing your cash flow is a set of strategies and tactics to ensure you have more money coming in than going out at the right times.
Tips for managing cash flow
Cashflow is all about increasing your cash in, and decreasing your cash out, and controlling the timing of these flows as best you can.
Determine your break even point
Your break even point will tell you how much money you need to make to cover your businesses costs.
Start with identifying your product costs or ‘cost of goods sold’ (COGS). These may include raw materials, like ingredients, labels and packaging if you manufacture and sell a food product, for example. Also identify your fixed costs, which may include ongoing costs like your website fees, store rent, warehousing and insurance. You can check out this guide to understanding your overhead costs.
Then, consider the price of your product or service and how many units (or bookings, perhaps) you need to sell to cover your costs. When you meet your break even point and exceed it is when you start to make a profit. You can use this guide to determine your break-even point.
Hit your deadlines
Get across due dates for all your expenses, whether they’re production run invoices or electricity bills. You may see a delay between production and sales, for instance, where you have to pay a large sum for manufacturing before you’re able to sell your product. Having a healthy cash flow means you can afford to cover this cost and wait for the cash from sales to come in, sometimes months later.
Create a cash flow forecast
Creating a cash flow forecast helps you stay on top of when you need to make significant purchases and pay your bills and debts. It also shows you when you expect sales revenue to come in to offset these costs.
It’s important to create a financial forecast and budget, and check in with this weekly or monthly. Assigning someone to this task will help you stay on top of it!
Typically, a cashflow forecast will have an opening bank balance (i.e. actual cash on hand) and show cash inflows and outflows for each period, usually by month. As well as regular operational costs, outflows will include things like loan repayments, payments to the business owners and asset purchases.
The number at the end of each month is referred to as the closing cash balance and this number becomes the opening cash balance for the next month. This number will be positive or negative and will show you if you’re hitting your break even point. If you’re not, you can begin to analyse why (like you may not have enough of a margin between your cost of goods sold and your sale price, for example), and you can begin to adjust your pricing model.
Or, you can see that you have a healthy pricing and operating model, but you need to cover the gap in between making purchases and making sales. You could consider a small business loan to cover this lag.
Encourage easy, early payments
Communicating with your customers about how you expect to be paid improves your likelihood of being paid on time.
Set your invoice terms
Use benchmarks in your industry to determine what’s a reasonable payment window – it could be anything from 7 days to 30 days to 90 days. Of course you want to be paid as soon as possible but that must be balanced with your customers ability to pay. You may find you’re more likely to be paid by allowing payment installments over time.
If you get sizable orders or bookings, it’s worth asking for a deposit, of say 50%, to help get you started the order, or cover your set-up costs for the service. Remember everyone is trying to manage their cash flow!
Provide payment options
There are a number of ways that you can accept payments for your business. Square’s payment solutions make it easy for your customers to pay you on time:
- You can use the Square Online to accept payments on your website. Alternatively, you can create a checkout link or add payments to your existing site.
- If you have a brick-and-mortar store, the Square Point of Sale is a customisable POS system that’s easy to use and set up. Plus, POS hardware like Square Reader and Square Terminal will allow you to accept card payments as well as cash.
- Whether selling online or in person, Square Payments allows you to build the hardware and software solution you need, including the ability to create invoices and accept payments over the phone.
Upgrade your accounting software
Manage invoicing and billing with software like Xero. The sooner you can create and send an invoice, the sooner you can be paid. Create a system that alerts you when due payments are coming up. Investing in robust accounting software will enable you to set up your system seamlessly.
Seek financial advice
It’s also a good idea to have the support of an experienced bookkeeper to stay on top of accounting hygiene and financial planning and cash flow best practices for your business. Staying close to your income and expenses and getting the ongoing input of an accountant will allow you to become your own cash flow expert!
This article is for informational purposes only and does not constitute legal, accounting, or tax advice. The information contained herein is subject to change and may vary from time to time in your region. For specific advice applicable to your business, please contact a professional.