Cash flow hacks from an accountant

A business’ cash flow is its lifeline. If your business is generating more than you’re chucking out — then great, but if it’s the other way around, you should get worried. From a cash perspective, a business works like a sponge — it absorbs cash and you have to squeeze really hard to get it back out. But if a business’ cash flow is mismanaged, no matter how hard you squeeze you’d hardly get anything in return. We’re here to offer some tips on how to manage your cash flow and wring the most out of it.

Firstly, let’s understand the basics of cash flow with some terms you’ll encounter:

• Accounts Receivable – the term used for what clients and customers owe your business.
• Accounts Payable – the term used for the amount that you owe your suppliers.
• Shortfalls – the amount where a liability or obligation that is due exceeds the business’ ability to pay.

Next, we’ll give some pointers on how to manage cash flow effectively:

Know what you’re working with

Accepting and understanding a business’ working capital is the first step to cash flow mastery. Ensure that your business has enough funds for your needs. Are you far behind in invoicing? Are your existing projects currently tying up a lot of cash? Do your current customers owe you a significant amount? How long do you have until you need to pay your suppliers? These will all deplete your resources if not managed accordingly. It’s often said that every business should keep three months’ worth of outgoings in the bank for emergencies. If this is not possible, just make sure that you have some sort of buffer so that your budget doesn’t go down the drain.

Plan, plan, and plan

Now that you know what you’re dealing with, it’s time to plan ahead. Prepare for your down season to avoid any shortfalls. To give you a more feasible target for your sales, you need to work out your outgoings first. Subsequently you can set a realistic sales target to keep your business afloat.

Review everything

Make sure everything is in order. Have any customers not received invoices? How quickly do you collect account receivables? Do you check your suppliers’ costs to make sure that you’re not being billed for items or equipment that you have not received? Be on top of your accounts receivables and accounts payables to smoothen your cash flow and help you plan how to move forward.

Cut costs

Stay on the lookout for possible ways to improve revenue or cut costs. If something isn’t working for your business, take action. For example, create reviews for your suppliers and phase out any service lines or products that contribute minimally. Make sure that everything that you have for your business contributes to its growth – this means cutting off unproductive employees as well.

Cash flow management begins by understanding how businesses work, being able to access sufficient working capital, and working with a well-planned and productive approach. Finally, as long as you keep your cash flow positive, your business can weather any financial storm – and you’ll get better sleep at night too!

For more details about the survey, and for advice on tackling late payments, visit www.xero.com/au/cashflow-gap

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Source: Xero Blog