Managing business cash flow

Good cash flow is essential for any business. Being able to meet overheads whatever the circumstances, and having a surplus, are signs of a healthy business.

We’ve put together some tips to help with managing business cash flow. It’s a general guide so please seek professional advice for your own business.

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Advantages of good cash flow management

Ability to absorb, manage and prepare for the unexpected.
Minimises interest charges on overdrafts.
Identifies surpluses that can be invested and earning interest.
Gives you more control of your business, enabling you to make informed decisions about expansion and development.

Does your business have good cash flow?

These questions may help you figure out your business cash flow position:

Do you ever go into overdraft unexpectedly?
Do you have seasonal cash flow shortages where you struggle to meet expenses?
Do unexpected bills send you off to the bank for an emergency (temporary) overdraft?
Are you waiting for customers to pay before you pay your suppliers?

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Cash flow is about shortfalls and surpluses

Successful cash flow depends on the timing of money flowing in and out of a business. Income and expenditure rarely happen together so good cash flow can help you prepare for shortfalls.

Inflows may include:

Payment from customers for goods and services

Receipt of a bank loan

Interest or returns on deposits or investments

Shareholder investments

Rental income on investment properties

Outflows may include:

Payments for stock, raw materials or tools

Wages, rent and daily operating expenses

Purchase of fixed assets

Loan repayments

Dividend payments

Drawings from the business

Payments for income tax, GST and other taxes

Surpluses are good. Shortfalls are not.

A surplus is a good problem to have. Here are some options you might like to consider:

Put it into a term deposit or business savings account to earn interest.
Use it to fund expansion.
Make advance payments to your creditors. This will enhance your credentials.

If you have a shortfall in funding, here are some options you might like to consider:

Set up an overdraft facility or review your current overdraft limit. Your overdraft should cover the highs and lows of seasonal business variations.
An ABC Bank Visa Business credit card is a useful short-term cash flow management tool. With our ABC Bank Visa Business Rewards credit card you can also earn True Rewards Dollar when you spend.
Longer term, talk with us about term loan finance solutions.

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Two easy steps for managing cash flow

1. Prepare a budget

Budgeting for the business financial year will help you foresee any cash flow problems before they occur. We may also need to see your budget if you’re applying for an ABC Bank business or rural loan to help with your cash flow. You may want to split your budget into monthly cycles for closer management.

2. Forecast cash flow

Think ahead to what the next 12 months may bring, and monitor your cash flow forecast with what is actually happening in the business. Generally your forecast should include:

Cash receipts.
Cash payments.
Surpluses and shortfalls in receipts over payments.
Opening bank balances.
Closing bank balances.

Top tip:

It’s a good idea to get your cash flow forecast prepared by an accountant as they know exactly what to do and can give you professional advice.

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How to improve cash flow

Here are some simple ways you may be able to improve your cash flow. Remember this is a general guide so please seek professional advice for your own business.

Manage debtors

Offer prompt payment discounts, and don’t extend the timeframe.
Consider reducing your payment terms ie 7 days, not 30.
Encourage electronic payment into your ABC Bank account.
State your payment terms on your invoices.
Make your invoices clear and brief.

Chase debts

Learn your debtors’ payment cycles and ensure your invoice is approved in the payment run.
List all your receivables in order of size and date. You’ll soon spot those who continually pay late.
Put late payers on a cash-only basis.
If they continue to be late payers, consider withholding future services or goods.

Have a credit policy

Complete a credit check on new customers.
Review existing customers regularly and be prepared to change their credit rating.
Agree payment terms for new customers when you set up their account.

Manage stock levels

Avoid tying up large amounts of cash in stock.
Try to balance stock levels so you have enough to satisfy customer demand.
Consider ordering less stock more often and make ‘just in time’ arrangements with your suppliers.

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Next steps

We hope you found this guide useful for helping manage your business cash flow. For more information on our business accounts, credit cards or business and rural loans, please get in touch with us.