Starting a small business usually means taking some financial risks, and for a while, some financial hits. Apart from the initial investment, there may be inefficiencies or errors made during the crucial startup days. According to Dun & Bradstreet, 90% of the small business failures are caused by poor cash flow. For small businesses, the importance of properly managing cash flow cannot be over emphasised.
Here are a few key strategies to manage cash flow for a small business:
1. Plan and budget six months to a year in advance
Always prepare and maintain a rolling budgeted cash flow statement for six months to a year in advance and update/monitor the forecast regularly (perhaps on a fortnightly or monthly basis). This will ensure that your cash flow forecast correctly reflects past performance and produces a more reliable future forecast. A clear and up-to-date picture of expected income and expenses helps you manage cash flow issues more effectively and act before it gets totally out of control!
2. Invoice and collect payments on time
One of the mistakes that small businesses often make is that they either do not invoice frequently enough or do not collect on time. Ensure you raise invoices as soon as the job is completed rather than waiting for the end of month and where possible, obtain payment in advance. If you delay invoicing or follow-up payments, it’s easier for your clients to delay the payment as well. Having robust invoicing and debt collection processes in place will pay dividends!
3. Monitor your gross margins
Having strong sales doesn’t necessarily result in a profitable business if you have not priced your product or services right! Startup small businesses often do not have adequate gross margins to support the operating cost of the business. Ensure you have calculated an all-inclusive cost of your product or services and that you have included enough margin on your prices to be profitable!
4. Maintain cash reserves for unexpected expenses and to meet your tax obligations
From our experience, we have found that all too often, startup small business owners do not plan for their tax obligations and take too much cash out of the business for their personal expenses. We have also found that many small business owners have no idea what they will owe in taxes until they become due, because they are either not working with their accountant or they are not providing their data until right before the tax lodgment deadline!
Ensuring that your business has funds set aside to meet unexpected business expenses or seasonal sales fluctuations and to meet your tax obligations makes sense and needs to be planned. As an example, you may find it prudent to place aside (perhaps in separate bank account), approximately 20% - 25% of the gross earnings to assist in paying your personal tax liabilities, and this would be in addition to putting aside amounts to meet business taxes such as GST, PAYG withheld from salary and wages, superannuation guarantee and income tax instalments.
And there you have it. Four strategies to help you avoid the common pitfalls relating to cash flow. Keep them in mind from the outset, get help where necessary and get that business of yours going!