How to Keep Cash Flowing
A Guide to Cash Flow Management
Many founders and leaders don’t realise the importance of cash flow until their business experiences a cash crunch. Keeping cash flowing is essential for businesses who want to survive tough times and thrive when the sun shines.
In this guide, we share our accounting and business advisory expertise to help you cut friction and get paid faster, reduce time spent in the cash cycle, understand the cost of chasing payments, and build up trust with the right customers and suppliers. Do this and you’ll keep the cash cycle spinning in your business.
Contents
01
Why Business Owners Overlook the Importance of Cash Flow
Cash flow will always have the power to make or break a business.
Many people trying to grow a business ultimately focus on whether they’re profitable or not. But sometimes making profit doesn’t necessarily mean you’ve got enough cash to keep the lights on. In any sort of business where you owe money, cash flow is vital.
At BlueRock, we highlight to our clients that while your business may be growing, and it seems to be profitable, there are always some hidden things lurking within the balance sheet.
Know Your Cash Flow Cycle
The cash flow cycle is about when your customers are going to pay you and if you’re not aware of how those cash cycles work within your business, you can get caught out; especially if you’re quick to make payments to your suppliers but your customers are not as quick to pay you. Knowing the balance between when cash is coming in the door and when you’re paying people that you’re committed to is paramount.
It’s not a set-and-forget kind of scenario, because things happen in business.
jacky magid, Co-founder and director of sales & marketing at charlie’s fine food co.
It might sound simple, but for Jacky, cash flow is about having the money in the bank required to pay bills and pay suppliers. If you don’t have the cash on hand to make these payments, you’ll have to explore a loan or other funding methods, which will impact your growth ambitions or ability to pursue a strategic direction.
Charlie’s Fine Food Co. plans and forecasts on a financial year basis, but reviews sales budgets quarterly and reviews cash flow weekly.
Quite a few businesses do misunderstand cash flow. Perhaps they focus more on margin or profit. We’re rigorous and hard on ourselves when it comes to budgeting, so it’s not really just about preparing a sales budget that forecasts the revenue, It’s also about phasing that, looking at when our customers will pay, when money will come in, and then from that we build our expense budgets. It shows us that there’s no point having that dream of buying that new trade fair stand at that particular month if that’s going to be a month when the cash is not coming in.
02
Shortening the Cash Flow Cycle
Cash flow red flag: Your cash balance goes into the negative because you’re funding all the costs while not being able to collect.
First and foremost, it’s important to understand the differences among your customers. Are they B2C, B2B, or a mix? Are you on top of the different arrangements you have with them all for payments?
If you’re selling high volumes in high frequency to a large number of customers, you’ll need to think about minimising the friction between how people pay you. Big procurement cycles aren’t worth it for small value.
Look at the cash you’re generating but also the mechanisms by which you get paid. Remove frictions for credit card payments, or if you’re selling on terms, what are they, and how short can you make them so that you’re not carrying a lot of that cost yourself.
5 Tips for Cash Flow Cycle Management
- Set a realistic sales budget, but understand what goes into the mix of how you generate that revenue.
- Tailor your methods and approaches based on customer needs and the type of business that you’re running.
- Have a plan about what’s coming up in the business.
- Tax: have an awareness of when payments are due.
- Strike a balance between paying debts you owe, and receiving payments from your own customers, so you’re not caught out.
Cash Flow Story Time
One of our clients was planning out the upcoming financial year. This business wanted to set a high-growth budget, going in excess of 100% revenue growth. Once that was put together, it was clear the impact on margin was improving, but the cash balance wasn’t changing at all.
The payment terms the business had with its clients had not been revised, and sat for the most part at roughly 40 days. At the same time, they were paying almost on-demand in terms of supplier costs. What we found was the cash balance actually went into the negative because they were funding all the costs and not being able to collect the cash.
Our solution was to tweak our model to reduce those cash days from 40 down to 14, and lo and behold, we had enough working capital to fund that growth for the next 12 months.
03
Relationships Impact Cash Flow
It’s OK to ask for shorter payment terms.
Pre-COVID, Charlie’s Fine Food Co. was predominantly a B2B wholesaler to the food service industry: airlines, hotels, function centres, sporting venues, caterers, and exporting to retailers overseas. Today it also has a small B2C sales portal and supplies to supermarkets. For each of these customers, it must manage the relationship, and each has an implication for the cash flow cycle.
To give an idea of the range, the business has a cash purchase online platform for instant payments for smaller clients, and 14-day terms with one major retailer, which Magid was able to negotiate down from 30.
It’s OK to ask for shorter payment terms. We often think we’re takers in the market, and we don’t ask. But there are a lot of bluechip companies out there that will offer smaller businesses shorter payment terms. I would encourage small businesses to ask the big companies what payment terms are available for different sized organisations.
jacky magid, Co-founder and director of sales & marketing at charlie’s fine food co.
As a small business owner, it’s about knowing your customers and asking yourself: ‘OK, well how many of those sorts of customers can my business afford?’ Finding the right balance of big and small customers is a key to good cash flow management.
5 Cash Flow Tips Around Managing Relationships
- Ask! You won’t know what favourable payment terms are available if you don’t ask, and these can make a huge difference to your cash cycle.
- Where suitable, set up payment portals for smaller clientele and orders – chasing that money manually can be costly.
- Choose to work with good customers! People and organisations who appreciate what goes into running an SME and who have an appreciation of the costs you are incurring before a product is delivered, are favourable.
- Lean on your story: customers who know and appreciate your position will be more inclined to treat you well.
- Balance your larger customers and longer payment terms with smaller ones who pay faster, they keep the cash coming in.
04
Debtor Management: Getting the Communications Right
Classy Tails, founded by Fotini Pratis, is a premium pet product business with a B2C and B2B presence, including direct sales to consumers mixed with the wholesale supply of products to boutique pet supply shops. To manage their cash flow, monitoring the balance between customers is important, and keeping in close contact with wholesale customers (but not too close!) is key.
How a business manages its debtors is a huge part of keeping cash flowing. When it comes to late payments, sometimes a simple phone call is the key to improving the relationship, receiving payment, and having a better understanding of their satisfaction and needs.
Monitor your debtors, and make sure they aren’t slipping away. Try a phone conversation to begin with, to understand why people aren’t paying. It’s polite at the start and can get firmer if need be.
fotini pratis, founder of classy tails
One tactic you can implement is putting late paying customers on a red alert list, which you actively monitor to make sure they have paid when they promised to pay. If they haven’t, get on the front foot with a phone call.
Striking a balance is also important. You can lose a customer if you go too hard. But checking in with late or non-payers can also alert you to the reasons why. They could be going to another supplier, or have an issue with the order, so it’s usually in your best interest to communicate early.
When it comes to taking on new customers, perform your due diligence and make sure that they are going to be reliable. CreditorWatch is a great tool, and business managers can also check references, or seek executive guarantees, particularly for big businesses.
6 Cash Flow Communication Tips
- Do your due diligence and make sure your customers have good credit ratings. Creditor watch costs money, but gives a detailed report, and if you think about the debt that could be lost, it’s a saving in the end.
- Consider discounts for early payments, an incentive to pay up, or preferential payment terms for larger or later payments.
- Chase payment, but don’t get too pushy, as you could lose a customer.
- Don’t spend good money chasing bad – payment for your goods and services is important but chasing it can be costly from a time and financial perspective.
- Check in – do late payments mean unsatisfied customers? What can this tell you about your service and how it can be improved?
- What else could late payments be telling you? Is your customer’s business suffering? What opportunities does this create to strengthen relationships?
05
Big Customers and Cash Flow Risk
There’s a sense of temptation and excitement when presented with the opportunity to supply to a large-scale client, but SME leaders must also be wary and understand the risk of client concentration.
For a small business, landing a major client can mean huge opportunities for growth, so much so that many jump in head first. But it’s important to know and prepare for the implications and risks. A big client who pays late can actually run an SME out of business.
For example, a big customer that accounts for 60 or 70 percent of a small businesses’ revenue now also accounts for the same percentage of risk in terms of cash flow. If they have delayed payment terms, that's a high concentration risk.
If they don’t pay, and you’ve committed all these resources, that can be extremely dangerous for your business. Clients get excited about signing an ASX-listed client or a large business, and then not really understand the process that they’re going to have to go through to actually get paid.
Often with larger businesses, they have a lengthy internal process you have to go through to be approved as a customer. By the time that is complete, you may have already committed the resources within your business to make the supply.
Even once you’re set up as a supplier, ongoing issues could involve a procurement cycle or delayed invoice approvals at the client end, and before you know it, it’s been 120 days and you’ve committed resources with no reward.
3 Cash Flow Tips to Manage Big Customers
- Weigh up your concentration risk
- Understand your customer’s payment cycle.
- Go in with your eyes wide open, aware of the processes and hoops you need to jump through before you receive payment.
06
How Planning Impacts Cash Flow
Cater as best you can for high and low demand periods. Fotini Pratis recalls an experience in which she hadn’t ordered enough stock before the Christmas rush and sold out during a peak sales period.
After that, I looked at big events like Black Friday, Easter, Christmas, Mother’s Day, Father’s Day, what other events were around during different periods throughout the year, and then I made sure that I had stock in place to cater for that peak.
fotini pratis, founder of classy tails
Similar lessons apply in the world of cookies too. Jacky from Charlie’s sees bigger trade in the second half of the calendar year as winter is a cookie eating time, while summer tends not to be. “January’s terrible; everyone’s on a diet post-Christmas, so there are definitely elements of seasonality that we build into our cash flow forecasts."
Stock and sales isn’t all that needs planning for. Many businesses need to hire extra staff over the holiday period and face quite a large cash flow crunch in February, when they have to pay PAYG. Investing in the creation of a solid cash flow forecast can help you avoid seasonal impacts and keep cash flowing.
Get Help Managing Your Cashflow
Cash flow forecasts are your go-to guide for better financial planning and smoother business operations. To get started, reach out to one of BlueRock’s business accountants, who can help keep your cash flowing steadily and confidently plan for those times when you know things will be tighter. Reach out to us for a consultation about improving your cash flow, or any other aspect of your business.
