Understanding Cash Flow Management in Your Business

Your cash flow is crucial to your business's success. Without the right management strategies, you could risk losing money and putting your business at risk.

In the last 12 months alone, 80% of small to medium businesses experienced a negative impact on their cash flow. This could significantly hamper operations, resulting in missed financial opportunities or declining profits.

While you may think it's simply keeping an eye on your accounts, it's actually a bit more complex than that.

This article outlines the key steps to effective cash flow management, helping you keep your business on track. For personalised business accounting advice, contact our team at Foresight Accounting today.

Understanding Cash Flow

The first step to better management is to understand what cash flow includes. Put simply, it refers to all payments made into or out of your business.

This generally includes:

• Revenue from sales
  Including cash and digital payments
• Business expenses
  From products to employee salaries, rent and more
• Investment or income interest
  Whether from savings accounts or stocks and bonds

So when it comes to managing your cash flow, you’ll need to keep track of each of these elements.

Some key strategies and steps your business should take to stay ahead of the curve include:

1. Ensure Accurate Accounting

Business accounting is crucial for managing your cash flow. A professional business accountant can ensure your books are managed effectively and offer key insights on your current position and future prospects.

With this understanding, you can make more informed business decisions by investing or withholding funds where necessary to maximise revenue. It will likely also make it easier to identify wasted or redundant costs that can be reduced, streamlining your processes and mitigating losses.

At Foresight Accounting, our team brings years of accounting experience, providing tailored support to businesses of all sizes across various industries.

From meticulous bookkeeping to tailored financial planning, Superannuation management and more, we’ll help ensure your business is in the best position possible.

2. Credit Options

Offering credit options to your customers can increase the likelihood of purchase. It means a customer can ‘buy’ your product now and pay later. This not only increases your number of potential customers, but can also encourage them to spend more and more frequently.

However, employing credit options without significant oversight may put your business at further risk. Ensure you have tight credit terms and be proactive about following up payments, either with reminder invoices or clear terms and conditions.

Failing to follow these steps when employing credit for your customers could increase your chances of late payments or non-payment debts. This means your business will not enjoy a consistent cash flow, and may be left waiting.

This could slow down your own purchases, making it harder to restock or meet demand. If you already have a credit option, carefully review your policies to see if they can be improved.

3. Keep a Cash Reserve

While cash flow is crucial, ensuring you have access to funds when necessary may be even more important. Building a cash reserve ensures you can access a cushion of cash when unexpected expenses arise.

By planning your cash flow, you can consistently put aside small amounts of profit to steadily build a cash reserve. While this may ‘reduce’ your current profit, it ultimately safeguards you against future loss.

Currently, only 27% of Australian businesses maintain a cash reserve, which provides them with a competitive advantage in sustaining and supporting their operations. If your business has not established a cash reserve, consider how you can adjust your cash flow to do so.

4. Assess Your Inventory

Regularly check your inventory to determine which items are in high demand and which are occupying unnecessary storage space. Do your best to eliminate items that are in low demand and reorganise the timing and quantity of stock orders to avoid excess.

This not only frees up space but also ensures you are only spending what you need at any given time. Having responsive yet controlled stock allows you to increase your efficiency and cut redundancies.

In Australia, 58% of retail brands and D2C manufacturers had inventory accuracy below 80%. This often resulted in overstocking, costing these businesses an average of over $300,000, making it clear why accuracy is crucial to your bottom line.

Take One Step Closer to Financial Security with a Business Accountant Melbourne

Are you seeking a more effective way to manage your cash flow? Contact Foresight Accounting today for proactive, expert advice. With a free consultation in our Malvern office, we’ll get to know you and your business's needs to offer real support. Help your business thrive and book a meeting with our team.

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