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A better cashflow management system can ease tight cashflow

Many businesses suffer the problem of tight cashflow in the post-Christmas period. It’s not only the expense of the festive season; people are away, customers are recovering from holidays, and work can’t be completed.

If you plan correctly now, there is no need to suffer from tight cashflow.

This is the most important part of any business: without cashflow, no business can pay wages, expenses, or the business owner! The ultimate risk is going broke but even very profitable businesses can have cashflow difficulties.

While tight cashflow can affect any business from time to time, new businesses especially need cash up front, as it usually takes a while to become profitable. Older businesses, whilst more stable, are not immune to a few bad months, especially if the economy is taking a hit or a major customer is slow to pay.

These five steps will help you get better control over your cashflow to avoid problems in the next few months and beyond…

1. Understand your business’s cashflow

Small and medium-sized businesses across different industries manage their cash flows in different ways.

In its simplest terms, cashflow is the difference between cash coming into your business accounts and cash going back out.

For construction businesses, the cashflow involves:

  1. Buying materials;
  2. Building the product;
  3. Paying subcontractors and employees; and
  4. Collecting on the build

Although this may seem pretty easy to manage, what most business owners struggle with is the amount of time between each step.

If you could complete all four steps in a single day, then you’d never have to worry about your cash flow. This, however, is a lot easier said than done, and it’s not something you or anyone else can change.

When it takes more time to convert the cash going out into cash coming in, shortfalls happen. If shortfalls happen each month, your cashflow will dry up and your business will face problems.

We don’t want this to happen: so understand how your business’s cashflow works and you’ll be better prepared to plan for it.

2. Monitor your account balance carefully

When you invoice a customer, do they pay immediately? For most transactions, it takes at least a few days for the money to arrive.

This can cause serious problems if your bills are due and you are waiting on payment from customers.

To anticipate these types of problems, monitor your bank account so that you can plan for any upcoming payments and make other arrangements if you know a payment won’t enter your account in time to pay a bill.

With online banking and smartphone technology, it’s easy enough to keep track of your account balance from your phone or mobile device.

3. Plan your workflows precisely

Most times, you won’t get paid until the completion of a job or when ‘progress payments’ are made. Therefore, the faster you complete the job the quicker you get paid. 

If you are delayed in delivering part of the job, this will lead to delays in receiving the money. However, your suppliers will still be expected to be paid on time.

Planning your workflow is therefore crucial. Ensure that each job is completed in the shortest period possible.

All major projects should be mapped out to identify all steps and timelines in the process, and to forecast any potential delays.

If you are reliant on other parties, seek confirmation that there will be no ‘surprises’ that will interrupt your projected workflows.

Management of this process can be either manual or automated, using software such as  www.smallbuilders.com.au.

4. Plan your cash flow eight weeks ahead

In tight cashflow situations, you need to map out the timing of invoices, bills, and other expenses for eight weeks. This will allow you to see how money flows in/out of your account and anticipate what’s coming.

Online software programs like Xero (www.xero.com.au) and Quickbooks (www.intuit.com.au) provide a basic guide but don’t rely on this. You need to plan as accurately as possible.

When cashflow is really tight, you should ideally create weekly forecasts. After all, losing track of your finances could mean losing your business.

Don’t forget to include other expenses. If you have employees, not only do you have to pay them wages but you may also have to pay quarterly taxes. It’s also safe to assume that you will have other random expenses, such as equipment maintenance. Be sure to budget for this too.

Next, look to the future to see what projects and revenue may be incoming. You might have outstanding invoices from the previous month or a large account that will be handled in the upcoming month. Predict how much money will come in and whether or not it will arrive before or after your bills are paid.

The overall goal is to make sure you always have enough in your accounts to pay your bills on time.

5. Look for red flags and opportunities

When you finish mapping your accounts and creating weekly forecasts, you should look for potential red flags and opportunities to improve tight cashflow.

This might include the following:

  • Analysing your projections and looking for places where you know money could be tight;
  • Planning for these periods and marking them in red;
  • Looking for opportunities to bring workflow forward to expedite customer payments;
  • Analysing where costs could be temporarily cut without damaging services;
  • Seeking financing options or short-term hire to fund the purchase of new equipment – or delaying purchase if possible; and
  • Looking for short-term sources of finance.

After you’ve gone through the first month, look back at your projections and see how you fared. Did you overestimate or underestimate some weeks?

Using this new information, take another look at your second month’s predictions and make adjustments where necessary.

Your cash flow is vital to your business, and it’s always a hot topic with clients, especially when it’s tight. The secret is to deal with tight cashflow early – before it turns into a big problem.

Contact us for a chat about easing tight cashflow and get your business back on track.

 

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