Effective cash flow management is a critical aspect of running a successful business. Maintaining a healthy balance between incoming and outgoing cash can ensure financial stability and provide growth opportunities. In this article, we’ll explore essential tips to help you master cash flow management and optimise your business’s financial success.
Why is Cash Flow Management Important?
But firstly. Why is cash flow management so important?
We could tell you all the well-known sayings…
- Cash is king
- Cash is the lifeblood of business
- Turnover is Vanity, Profit is Sanity, but Cash is Reality
Regardless of any of the sayings about the importance of cash flow, the simple fact is without mastering your cash flow management; your business has a higher chance of failure. Research from The Australian Securities and Investment Commission (ASIC) states that poor cash flow is cited as a factor in 40% of business failures. Many of these failures could have been prevented through effective cash flow management.
Tips for Mastering Cash Flow
Track and Analyse Your Cash Flow
To gain control over your cash flow, start by meticulously tracking and analysing your income and expenses. Regularly review your financial statements (profit and loss, balance sheet, and cash flow statement) to understand where your money comes from and how it’s being spent.
Create a Cash Flow Forecast
A cash flow forecast allows you to anticipate future cash inflows and outflows. You can plan and make informed decisions by projecting your expected cash position. Identify potential cash shortfalls or surpluses in advance, enabling you to take necessary actions to prevent financial setbacks.
Optimise Accounts Receivable
Streamline your accounts receivable process to ensure timely payment from customers. Establish clear payment terms, send out invoices promptly, and implement a system for tracking and following up on outstanding payments.
Refer to our previous article for our top tips for collecting overdue invoices.
Control and Reduce Expenses
Regularly review your business expenses to identify areas where you can reduce costs without compromising quality. Negotiate better pricing with suppliers, consider alternative vendors, and eliminate unnecessary expenditures. Small savings can accumulate over time and positively impact your cash flow.
Recently we assisted a client with a review of their suppliers, resulting in a 35% saving on their material costs.
Establish Cash Flow Reserves
Building a cash reserve or emergency fund is a financial safety net during unforeseen circumstances. Set aside some of your profits to buffer against unexpected expenses or revenue fluctuations. Having cash reserves provides peace of mind and allows you to seize growth opportunities when they arise.
Optimise Inventory Management
Managing inventory levels is crucial for maintaining a healthy cash flow. Refrain from overstocking items that tie up your funds and can become obsolete. Conversely, ensure you have sufficient stock to meet customer demand and prevent lost sales. Implement inventory tracking systems to optimise your stock levels.
Explore Financing Options
Consider exploring various financing options during cash flow gaps or growth opportunities. Lines of credit, business loans, or invoice factoring can provide additional working capital when required.
Mastering cash flow management is essential for the long-term success of any business. You can ensure a steady and sustainable cash flow by diligently tracking cash flow and managing your working capital.
Remember, cash flow management requires consistent monitoring, analysis, and adjustments. By implementing these strategies, you’ll be well-equipped to navigate financial challenges, seize opportunities, and achieve financial stability and growth for your business.
If you need expert guidance and assistance in managing your cash flow effectively, we are here to help. Contact us today to take control of your business’s financial future.
Strategic planning is pivotal in determining long-term success in the fast-paced and competitive business world. By setting clear goals and developing actionable strategies, businesses can navigate challenges, seize opportunities, and drive growth.
The Power of Strategic Planning
Strategic planning defines a company’s vision, objectives, and actions to achieve them. It provides businesses with a roadmap, guiding their decisions and ensuring alignment with long-term goals. We believe strategic planning is crucial for the following:
Direction and Focus
A well-defined strategic plan sets the path for the business. It clarifies the company’s purpose, values, and desired outcomes, keeping everyone focused on a shared vision. With a clear direction, businesses can make informed decisions and allocate resources effectively.
Strategic planning enables businesses to anticipate and adapt to changes in the market, technology, and consumer behaviour. Businesses can identify potential threats and capitalise on emerging opportunities by conducting thorough market research and analysing industry and business trends.
Effective strategic planning helps businesses optimise their resources. By aligning objectives with available resources, companies can allocate funds, personnel, and time more efficiently. This ensures that resources are utilised in the areas that provide the greatest value and support achieving strategic goals.
Strategic planning involves assessing potential risks and developing contingency plans. By identifying vulnerabilities and implementing risk mitigation strategies, businesses can proactively address challenges and minimise their impact on operations and profitability.
The Role of 3-Way Budgeting in Strategic Planning
An essential component of strategic planning is 3-way budgeting. We believe that 3-way budgets underpin strategic plans:
3-way budgeting provides a comprehensive view of a business’s financial health. Businesses gain insights into their financial performance by integrating revenue projections, expense forecasts, and cash flow estimates. This visibility enables informed decision-making and facilitates allocating resources to support strategic objectives.
3-way budgeting ensures financial goals align with strategic objectives. By integrating financial targets into the planning process, businesses can evaluate the economic feasibility of their strategies. It helps identify the financial impact of various initiatives, such as product development, market expansion, or cost optimisation.
3-way budgeting allows businesses to monitor and evaluate their financial performance against established targets. By regularly comparing actual results with budgeted figures, businesses can identify areas of improvement, adjust their strategies, and make informed decisions to stay on track towards their goals.
Failing to plan is planning to fail
These wise words from Benjamin Franklin are a powerful reminder of the significance of planning in achieving success. By taking the time to strategise, set goals, and create actionable plans, businesses can position themselves for growth and overcome obstacles.
Strategic planning is integral to building a successful business in the Australian market. It provides direction, anticipates change, optimises resources, and mitigates risks. Additionally, 3-way budgeting underpins strategic plans by offering financial visibility, aligning goals, and evaluating performance. So, remember the wise words of Franklin and prioritise strategic planning to unlock your business’s full potential and thrive in today’s competitive landscape.
Book a discovery call today if you need help with your strategic plan and/or 3-way budgets.
You can also read more bout setting goals here.
Are you looking for a way to optimise your business’s financial management and strategy? Look no further than a Virtual CFO.
What is a virtual CFO?
A Virtual CFO, similar to a traditional CFO, provides businesses with expert financial management and strategic planning services. However, Virtual CFOs offer added flexibility and cost-effectiveness. They can work with businesses of any size on a part-time, full-time, or project basis, allowing the business to choose the support level they require and scale the services as needed. Additionally, by working with a Virtual CFO, businesses can save money on salaries and other expenses associated with in-house employees.
How can a virtual CFO help your business?
What exactly can a Virtual CFO do for your business?
- Financial planning and forecasting: Virtual CFOs can aid in developing short and long-term financial plans and forecasting future cash flows. They can also assist in setting financial goals and developing strategies to help you achieve them.
- Budgeting and cost management: Virtual CFOs can help create and maintain budgets, which is essential for controlling costs and maximising profitability. They can also identify areas of improvement within the business and suggest ways to achieve cost reduction and increased value.
- Compliance and risk management: Virtual CFOs can ensure compliance with all relevant laws and regulations, protecting the business from legal issues. They can also aid in identifying and managing potential financial or operational risks.
- Strategic guidance: Virtual CFOs can provide strategic guidance, analyse company financial data and suggest ways to improve efficiency, increase profits, and achieve business goals.
- Performance tracking and improvement: Virtual CFOs can track the business’s financial performance and identify areas for improvement. They can provide regular financial reports and analysis and aid in implementing systems and processes to improve financial management and decision-making.
Virtual CFO Association
GAP Advisors is a member of the Virtual CFO Association, an elite peer network made up of experienced professional accountants with extensive backgrounds in commerce and various industries. We draw strength from combining our members’ industry vertical knowledge with our capacity to collaborate with each other.
As Australia’s strongest association representing these specialist professionals, we set the standard within the accounting profession.
Don’t let a lack of in-house resources hold your business back. A Virtual CFO can provide valuable financial expertise and guidance without the commitment of a full-time employee. Whether you’re a small startup or an established company, a Virtual CFO can work with you and your existing finance team to make informed financial decisions and achieve your business goals.
Don’t miss out on the opportunity to take your business to the next level! Schedule a discovery call today and see how we can help you optimise your finances, streamline your operations, and reach your financial goals. Click here to book your call now!
No matter how big or small the business, one thing successful businesses have in common is an effective and well thought out budget.
While having a budget is not mandatory, it is best practice as it allows you to effectively financial manage your business.
A budget is not a set and forget document. You don’t spend the time to create it, congratulate yourself on a job well done and then put it in the (virtual) drawer never to look at it again. A budget is a powerful tool and should be treated as a living and breathing document in your business.
We strongly believe that your budget should be created with your business goals and values in mind. There is no point in creating a budget for a business that does not suit your lifestyle or where you want the business to go.
Out top 5 reasons why every business should have a budget are:
1. Budgets provide structure
A budget provides your business structure with guidance and direction. It makes it clear what objectives you are trying to achieve not only from a revenue perspective but also with the operational running of your business.
Because your budget has been created with your goals and values, it also gives you a structure to make informed and effective decisions. Do you have the budget available to upgrade technology and equipment? Are you spending money on subscriptions that you are not using?
2. Budgets help you to predict cashflow
A 3-way budget provides incredible insights into your cashflow and movement as it takes into account not only your sales and expenses but also your working capital and other debt and financing activities.
Factoring in your payment cycles like quarterly BAS and super payments, annual registration payments etc, means you can not only predict your cashflow in advance but also make decisions to ensure you have the funds available at these times.
3. Budgets help you allocate resources
If your business is seasonal or cyclical resource allocation can be critical. Knowing you have the resources available during your quiet periods or downtime to continue paying wages and other costs gives you peace of mind and allows your business to continue trading.
Using your business drivers to calculate the variable parts of your budget allows you to more accurately not only allocate resources but also calculate the ROI. Examples of business drivers can include sales staff, the number of units produced or equipment utilisation.
For example, if you are a tour company, you can calculate the variable portion of your budget based on the number of each of the tours you provide. From this, you can then use the average number of km travelled for the tours to calculate vehicle downtime and the cost for servicing and maintenance.
4. Budgets help you model scenarios
Being able to model scenarios is one of the most helpful decision making tools for your business.
You are looking to hire a new sales person, and you expect there to be a 6 week period for them to get up to speed and reach their sales targets. What is the impact if that takes longer? What is the impact if you bring them on now vs in 6 months time?
Another good exercise is to complete a SWOT analysis for your business and model some scenarios around it.
5. Budgets allow you to measure performance
Every month you should review your accounts and compare your financials to your budget.
Are your sales higher or lower than forecast? Why?
Are your inventory levels higher than expected? Is this because sales were lower than forecasted or purchasing rates were higher?
Knowing your drivers and assumptions is particularly useful here as it will give you insights as to what has caused the variances.
When it comes to budgeting, practice makes perfect. Knowing all your business drivers and how they fit together takes real thought and understanding. Documenting these and your assumptions allows you to track, measure and report your business progress and refine your budget over time.
Need some help with your budget? Book a discovery call today!