For many small businesses, meeting the cash flow needs of their day to day operations can be a real challenge. The importance of cash flow management should not be underestimated,
even businesses that are profitable on paper can quickly come to a halt without effective cash flow management strategies in place.
When businesses struggle to maintain positive cash flow and meet compliance obligations, they can find it hard to pay employees and suppliers and can suffer from individual and financial stress which may lead to poor business decision making.
In this article, we look at the importance of cash flow management and some business cash flow management strategies you can implement to strengthen your cash flow and set your business up for growth and success.
5 Considerations for the Importance of Cash Flow Management
Negative Cash Flow Can Cost Your Business Money
Businesses with negative or poor cash flow may find that they are constantly borrowing to cover periods where they lack the cash flow to operate effectively. By borrowing against your future earnings, a business will pay the very real price of bank fees and interest.
Supplier and Customer Relationships Can Suffer
If a business is in a cash crunch, personal and business relationships can suffer. Business owners may find that they are contacting customers for overdue invoices more often and are always paying their suppliers late.
Businesses that lack the cash flow to operate are also more likely to be a situation where they can’t take advantage of opportunities to grow their business as they arise.
The constant challenge to find the necessary cash to pay suppliers and employees can take an undue toll on any business owner which can affect both personal and business decisions.
Businesses may also find that the morale of their employees can suffer. If your employees are worried about whether they will be paid on time, it can affect their motivation to complete their jobs on time and to a high standard.
Effective Cash Flow Management Strategies
Managing cash flow in your business is an important step to its long-term success. While delays in receivables happen in every business, implementing some business cash flow management strategies can help to improve your overall cash position and make managing the cash in your business easier.
Utilise a Cash Flow Statement
Creating a cash flow statement if you haven’t already should be a priority for your business. A cash flow statement details your weekly, fortnightly, or monthly payments and receivables. It breaks down exactly where and when cash is leaving your accounts and when it’s coming in. Over time your cash flow statement will give you valuable information on the state of your business’ accounts which can be used to better forecast for future periods.
Cash Flow Forecasting
Cash flow forecasting takes your cash flow management a step further by making estimates on future sales periods. Cash flow forecasting is effective in allowing you to approximate when your business may run into cash flow issues so that you can plan accordingly.
Businesses with stock and inventory can quickly find that a large portion of their available cash is tied up in their inventory. Implementing an inventory management strategy that balances your customers’ needs with your cash flow is imperative to ensuring that your business has the cash it needs to operate throughout your sales periods.
Accounts Receivables Reporting
Businesses that extend credit terms to their clients should have an accurate collections schedule in place that details creditor ageing (30, 60, 90 days). While credit terms can be a powerful way to build customer loyalty and trust, they also increase the period of time between when you pay for your inventory and when you receive payment from your customers.
Are you interested in learning more about the importance of cash flow management and how managing cash flow in your business can help maximise growth? Get in touch with Taggart & Partners for cash flow advice today. We are an accounting firm that takes a holistic approach to enhance your business operations. Our business advisors can help you with the structuring, cash flow and growth advice you need to succeed in the modern business landscape.
*** This publication is for guidance only, and professional advice should be obtained before acting on any information contained herein. Neither the publishers nor the distributors can accept any responsibility for loss occasioned to any person as a result of action taken or refrained from in consequence of the contents of this publication. Publication date July 2020