Small Business Resources › Business Financing Guide › Cash Management Techniques

Cash management techniques are the ‘ABCs’ of good business management. If your small business cash management techniques are subpar, your business will struggle to grow. Simple as that.

The core elements of how to manage cash in a small business and generate positive cashflow are:

1. Business cash management techniques 
2. Shortening the sales cycle
3. Understanding working capital

To be a cash positive and well managed small business, you’ll need to know these concepts back to front. 

1) Business cash management techniques

As a small business, cash management techniques are essential to prosperity and growth and there are some essential cash flow management strategies for running a business.

Get on top of invoices and payments

If your small business is invoice reliant for payment, this can be one of the key pitfalls of proper cashflow management.

• Keep on top of your accounts receivable and chase payments quickly and without guilt or hesitation.
• Have an accounts receivable ageing report to monitor your lagging customers and react accordingly to chronic late payers (perhaps require upfront payment from these customers).
• Tighten terms of payment and enforce penalties for late payments.
• Look into asking for down payments before work commences.
• Use accounting software to send invoices without delay, immediately upon beginning work.

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 it’s coming or have any idea in what quantity.

Take advantage of easy reporting in your software:

• Luckily, almost any quality cloud accounting app can produce a cashflow forecasting 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.

Small business cash flow management

Software and professional advisors are a key element to your small business cashflow management. 

There are a few cash flow management strategies for small business that you can utilise.

Be sure you’re implementing the following to make monitoring, reporting, invoicing, and projection a simple affair.

• Make use of cloud accounting software to easily and visibly monitor and report on your ingoing and outgoing funds, while also being able to send invoices quickly and be sure your business dealings are compliant.

• Use your business advisor to maximise your management of cashflow. Your advisor, accountant or bookkeeper is trained and skilled in exactly this function, so it’s worth its weight in gold to consult with them to improve cashflow.

• Make it a regular part of your week to actively scrutinise your invoices, accounts receivable, debts and expected incoming cash. Neglecting these tasks is a key driver of poor cashflow management.

Shortening the 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 six 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 the sales cycle and improve cashflow.

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’ll be on bank 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.

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, creating a perfect cashflow scenario. But understanding working capital is more complex than that.

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’ll 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.
• Work on building a pool of cash reserves to dip into, as required, when a shortfall presents itself.

In paying attention to the above cash management techniques, you’ll have a solid basis from which your business can generate positive cashflow and be on sure footing to accelerate growth.