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Keeping Up with Growth: 8 Cash Flow Management Tips for Small & Medium Businesses

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The Australian economy is looking good, and the majority of SMEs are experiencing bigger profits in 2019. According to Scottish Pacific’s March 2019 SME Growth Index, “Growth businesses are forecasting an average 4.9% revenue rise (up from 4.5%), and only 1in 4 SMEs expect revenues to remain flat.”

That’s great news for business owners. However, it can also create growing pains where many SMEs struggle to generate enough cash flow to keep up. So much so that 69% of business owners have been forced to tap into their own personal finances. 

With that said, here are 8 ways to keep up with growth and better manage your cash flow.

 

1. Continually Analyse Your Cash Flow

Whether you hire an accountant to handle your finances or do it in-house, it’s important that you keep a close eye on your cash flow on all times. You’ll want to know how much money is coming out, how much is coming in and what your financial forecast looks like. 

This way you’re far less likely to encounter any big surprises that could put you in a financial predicament. Instead, you’ll always have a bird’s eye view on current cash flow data and can take proactive actions whenever necessary. And fortunately, there are multiple software platforms that can assist you with monitoring your cash flow. 

Here are 3 notables ones worth checking out:

 

2. Maintain Cash Flow Reserves

The old saying, “save up for a rainy day” applies perfectly to this situation. Business can be unpredictable, and you never know when you’ll run into an emergency where you desperately need extra cash flow. 

Maybe a normally reliable customer fails to pay on time (this happened to 47% of invoices Australian businesses sent out in 2019). Maybe a critical piece of equipment breaks down and requires a costly replacement. Or maybe customer demand spikes all of a sudden, and you desperately need money to buy more inventory. Whatever the case may be, you never know when you’ll need a major increase in cash flow. 

That’s why most experts suggest having a minimum of 3 to 6 months working capital in place to account for unexpected demands. This should provide you with enough wiggle room to push through and account for any curve balls that may come your way.

 

3. Negotiate Agreeable Payment Terms

One of the biggest hindrances to effectively managing cash flow is having unfavourable payment terms. The median wait time for all Australian businesses is 26 days, but it can be as long as 35 days for some industries like wholesale trade.

“Trade credit invoices are a long-standing and well accepted practice between businesses, says online accounting software provider Xero. “However, problems arise for SMBs when they endure long waits for payment, even if payment isn’t strictly late.”

If you get sucked into disagreeable payment terms, there’s a good chance you’ll run into trouble later on, and it can put a strain on your cash flow. Payment terms between large companies and SMEs tend to favour the former rather than the latter, so you should always use caution when agreeing to something and putting it in writing. 

If possible, explore possible relationships with multiple vendors, and do business with ones who pay SMEs within a reasonable period of time. Be diligent about following up on payments, and don’t hesitate to offer reminders when money is due. This guide from Fundera offers five late payment email scripts you can use to follow up professionally. 

Also, try to be flexible with payment methods and give clients a few different options such as direct deposit, PayPal and Bill.com.

 

4. Don’t Pay Earlier Than You Have To

You can also free up cash flow by waiting to pay vendors you’re partnering with. 

“Unless there’s a worthwhile incentive for you to pay early, figure out how late you can pay your vendors without risking late fees or harming your relationship,” explains small business and entrepreneurship thought leader Rieva Lesonsky. “This keeps the cash in your account and out of your vendor’s until it absolutely has to be there.”

While you certainly don’t want to create any friction or sour key relationships, this is a fairly easy way to better manage your cash flow and reduce your stress.

 

5. Eliminate Unnecessary Costs 

Most SMEs have a lot of different costs they can eliminate or at least reduce, which can in turn free up capital and bridge the cash flow gap. Here are just a few ideas:

  • Digitise your business - Switch from storing files and information on paper to electronic documents. 
  • Use the free versions of apps - In many cases, you can find free versions of apps that are perfectly sufficient for handling business tasks rather than paying for premium versions. 
  • Buy used equipment - Often, you can find high-quality used equipment for a fraction of the price you would pay for something that’s brand new. 
  • Use inexpensive online marketing techniques - Strategies like social media and SEO can help you reach a massive audience without spending a fortune. 
 

6. Obtain Professional Financing

There’s a lot you can do to improve your financial predicament on your own. But sometimes you need to partner with a reliable lender to generate the necessary cash flow to keep up with business growth. There are numerous options available that can cover a wide variety of needs for SMEs. 

For instance, there’s equipment financing, which is “tied to assets like vehicles, machinery and equipment to free up cash flow. You can borrow up to 100% of the asset value with this facility with a fixed term and rate.” Another option is asset financing — a facility that’s an add-on for debtor finance that allows you to obtain additional funding by using your plant, equipment or property as collateral. 

Debtor Finance is another viable option. Also known as invoice finance or invoice factoring, debtor finance is a viable solution for small to medium sized businesses. And the concept is simple. Small and medium businesses can use their outstanding accounts receivable as collateral for a line of credit. 

Solutions like these provide you with fast access to cash flow, helping sustain your business during critical moments of growth. 

 

7. Don’t Grow Too Quickly If You Can’t Afford To

Growth is the goal of nearly all SMEs, and of course you’ll want to make an effort to take your company to the next level. Growing too quickly, however, comes with certain perils that be more harmful than helpful. 

For example, if you grow so fast that it drains your cash flow and you’re unable to keep up with customer demand, it can create great hardship and potentially dilute your brand equity. So while business growth should be a priority, you’re usually better off sticking to gradual, organic growth rather than moving too quickly. 

And always be sure that you’re able to scale up your infrastructure, customer service, and so on before making any major deals.

 

8. Staying on Top of Cash Flow 

Business growth can be both a blessing and a curse. On one hand it’s what propels your company into the future and leads to bigger profits. But on the other hand, it can potentially create complications if you lack the necessary capital to keep up. 

Implementing these cash flow management tips should help you stay on track and ensure you don’t bite off more than you can chew. That way you can keep a steady supply of money coming in without inviting unnecessary headaches.  

Has your business experienced growth in 2019? Is there a solution we can help with? Call us today on 1300 332 867, or have us get in touch here

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