As a business owner, one of the biggest responsibilities to deal with every day for business survival is cashflow. In a recent poll by the Small Business Development Corporation of Western Australia, 39 percent of businesses named cashflow management as their sixth biggest challenge as a business operator.
The Australian Securities & Investments Commission (ASIC) statistics tell us that on average 18,000 businesses each year enter into external administration or insolvency – with 60 percent of small businesses failing in the first three years of operation. In many instances, these failures are due to a lack of understanding of the importance of cashflow.
Cashflow is the lifeblood of every business, large or small, and a crucial component to track, manage and be fully across. No excuses, particularly in this climate when cash is hard to come by from banks and institutions post GFC.
The fundamental gap between when you invoice and when you get paid is the make or break of many businesses. And the cash you have stored for working capital or for slow months is a crucial habit and not a management function to leave to chance. The management of paying bills, taxes and other statutory payments such as PAYG (pay as you go) is a juggling act, so it pays to get right.
Expenses are a part of life, and good management of cashflow will enable you to manage the direction of your business rather than it managing you. It bodes well for a sense of peace and control. You may be trading profitably in the sense that you are “making a profit”, but unless your cashflow is under control, you are operating at risk.
Today’s economic conditions make cashflow planning even more critical to the survival, growth and profitability of business so appropriate “forward cashflow planning” is a good discipline. With little or no planning you could be forced to borrow additional funds or even have to sell up to cover debts.
Good money management
So if you want business stability, make good money management your thing. Being efficient and disciplined will put you in a freer position to jump on opportunities. Having this kind of flexibility is liberating to facilitate you making critical business decisions (eg. around investments, expansions and new service or product offerings).
There is a big difference between a liquid business and one making sales. As you well know, there can be a considerable amount of time between invoicing and the time you get to be paid from customers for the products or services you sell – known as the payment cycle. That time lag can wreak havoc on cash flow and your ability to pay your bills on time.
Unless you provide a service where you get paid in full ahead of time, or you earn regular retainers where your clients pay you at regular intervals, it is this payment cycle that you need to control. As a small business owner, you want to do more than just keep afloat and there are ways to minimise cashflow problems.
So how can your business successfully manage money better to avoid cashflow traps?