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Improving cashflow.
Your guide to improving cashflow in any size business.
Where’s your cash going?
Cashflow is the money coming in and out of your business – having more cash on hand helps the business thrive and grow.
Healthy cashflow is vital to any successful business. When the cash keeps flowing, you’ll thrive. Run out of cash, though, and you may struggle.
Cashflow is a constant worry for the owners of small-to-medium sized businesses. Problems with cashflow can be the biggest obstacle for survival and growth.
Improve your cashflow and your business will be in better shape – so we’ve created this guide to provide you with some tips and insights into successful cashflow management.
Cashflow runs three ways.
Positive cashflow
Neutral cashflow
Negative cashflow
What is cashflow?
1. Cash in
Cash going into your business includes:
- Money from sales, including cash, credit card or direct payments
- Interest on savings or returns from investments
- Loans from the bank or investors.
2. Cash on hand
The total amount of cash you can access within your business.
3. Cash out
Cash going out of your business includes:
- Costs like rent, electricity and phone bills
- Wages and taxes
- Paying for inventory and supplies
- Debt repayment
How to assess your cashflow.
- Ask your accountant, and,
- Check your online accounting platform, such as Xero, which will give you an instant cash summary.
Ways to manage your cashflow
Regularly track cashflow
Check daily, weekly, or monthly, depending on your business needs. separating personal and business accounts may also be a good idea.
Improve billing processes
Think about issuing invoices promptly and accurately, setting clear payment terms, sending reminders and offering multiple payment options.
What can cause cashflow problems?
Slow payers
When clients pay late, your business can quickly run out of cash. You might be owed a lot and still can’t cover bills. Relying on a few big clients or clients from the same industry can make this worse.
Lumpy income
Seasonal ups and downs can be challenging. The bills keep coming even when sales have taken a hit. For example, January and February are often slow for small businesses, while hospitality may struggle in winter.
Unexpected costs
Unplanned expenses like inflation, maintenance, or rent increases can strain cash, even with good planning.
Overlooked taxes
Every company needs to pay tax to a predictable schedule. Every business needs to set aside cash for taxes.
Low inventory turnover
When products sit on the shelves, they tie up cash until they sell. Too much unsold inventory can lead to cash shortages.
Unbilled work in progress
Sometimes projects are not billed until the work is complete. Costs keep adding up while you work, but you’re waiting weeks or even months before you get paid.
Rapid growth
Fast growth often means holding more stock, more and larger invoices, and sometimes new employees. This puts extra pressure on cashflow – often described as ‘growing pains’.
Seven ways to improve your cashflow.
- Change your payment terms
Adjust your payment terms to get paid faster. Instead of billing at job completion, consider setting payment milestones throughout. Or change your due dates from the 20th of the following month to 7 days after invoicing. Using e-invoicing can also help reduce the risk of costly invoice fraud. - Offer a range of payment methods
Make it easy for your customers to pay you – offer a range of popular and secure payment methods. - Have processes to help you get paid on time
Establish a formal process for following up on invoices to reduce late payments Set up automated invoice reminders, consider adding late payment fees and have a consistent timeframe for follow up calls. - Set aside tax money
Be prepared for tax obligations by saving enough money to cover them. Consult your accountant for guidelines on what percentage of sales or profits to retain. - Increase your prices
Are your prices too low? Check out what competitors charge – you might be able to raise the price of some products or services. - Shop around for lower-cost suppliers
Could you be paying less for products, services and/or utilities? Review your suppliers and look for lower-cost alternatives. - Use cashflow statements and forecasts
Track your cashflow history and create forecasts to plan ahead. This helps you anticipate potential shortfalls and ensures you’re prepared for future financial needs.
The power of forecasting.
Effectively managing your cashflow will make your business more resilient and stable. By planning, tracking and supervising your cashflow, you can have more confidence in your decision-making. One important way to do this is by using cashflow reporting and forecasting.
Download our handy forecasting spreadsheet.
Use this Excel worksheet to calculate your net profit before tax, and see any trends each month, or identify where expenses could be reduced.
Cashflow forecasting template (XL including Macros)
Cashflow forecasting template (XL excluding Macros)
These tools are intended as a guide only and are not intended to constitute financial advice.
Things you should know.
1 These tools are intended as a guide only and are not intended to constitute financial advice.
2 Eligibility and lending criteria, terms and conditions apply. An establishment fee may also apply.
The material on this webpage is provided for information purposes only and is not a recommendation or opinion.
The material on this webpage is does not take your particular financial situation or goal into account. We recommend you seek independent legal, financial and/or tax advice.
Links to other sites are provided for convenience only and Westpac accepts no responsibility for the availability or content of such websites.