3 essential cash management strategies
There are three core elements to effective cash management:
- Cashflow Forecasting
- Shortening The Sales Cycle
- Understanding Working Capital
To be a cash positive and well managed small business, you will need to know these concepts back to front. Let’s dive in!
1) Cashflow forecasting
Managing cash flow effectively remains a significant hurdle for many small businesses in Australia. It’s hard to manage your cash if you don’t know when its coming or have any idea in what quantity.
Take advantage of easy reporting in your software:
Luckily for you , almost any quality cloud accounting app can produce such a report with little effort. All you need is a decent range of data – one year should be sufficient.
The cash flow forecast will compare the cash you have on hand, as well as money that should be paid to you, against the money you need to pay within the same period.
For many smaller businesses having cash readily available is crucial to their success, therefore having a solid base for forecasting cash (i.e. reliable historical records as well as visibility of future transactions) can be extremely beneficial.
2) Shorten your sales cycle
Your sales cycle is extremely important to your cash management and needs to be attended to.
Your sales cycle is essentially the time it takes for a customer to find your business, order your products or services and deliver unto you that much needed cash.
As a matter of practice you should create a flow diagram and plot a timeline of your customer journey and sales cycle.
When you have done this, you may be shocked to learn how long your sales cycle is. For some of our customers, it’s as high as 6 months . This huge time difference between effort and payoff makes a difference to cashflow and management.
Your mission is to do everything within your power to shorten this cycle and improve cahflow.
Understanding your sales cycle is critical if you want to speed up cash flow in your business. With sales, speed is key and the quicker you can get cash into your business the less reliant you will be on loans and other funding sources down the track.
Some ways to shorten your sales cycle:
- Clarify your target market and ensure you target pain points with sales and marketing techniques
- Concentrate on hot leads and consider getting rid of ‘cold leads’ – target your efforts more effectively
- Automate and get rid of time wasting tasks – make sure that the sales team solely focuses on prospecting leads and converting them to customers.
3) Understanding working capital
In a perfect world, a business would buy stock or provide a service one day and get paid for it the next. With no lag between money out and money in, there would be no need to hold funds within the business to make the next sale or to cover expenses like wages, rent and tax.
In reality, every small business needs a pool of available cash on hand to span the gap. This available pool is the money your business has in the bank to fund a company’s daily operations – known as working capital – and it’s the essential bloodline of every business.
You will likely understand from experience how important working capital is, but you may need help calculating and working with this metric.
You can start this understanding by using the following simple accounting formula. First create two columns and list current assets and current liabilities.
From there, use this incredibly simple formula: Current Assets – Current Liabilities = Working Capital
Ways to improve working capital:
- Review terms on your invoices and consider shortening payment windows and increasing penalties for late payment.
- Pay your invoices on time and ask for discounts
- Monitor working capital regularly to predict cash outgoings and pinpoint choke points ahead of time.