Managing your cash flow can make or break your business. These tips will help you maintain the positive cash flow your business needs to thrive.
Track your progress
The right transaction account will help you monitor cash flow while an up-to-date cash flow forecast helps you to predict ebbs and flows in income. If you buy and sell inventory on account, an accurate cash conversion cycle will also show how many days it takes to turn your inventory into cash. An effective inventory management system can help to shorten this cycle by reducing the amount of cash tied up in stock. You may also be able to incentivise your clients to pay more quickly by offering discounts or easier payment options such as direct debit. This interactive cashflow calculator shows how much difference these changes will make.
Build up a reserve of cash
The pandemic has shown how quickly income can fall away or dry up completely for periods of time. For effective cash flow management, experts recommend you keep enough cash to cover expenses for at least three months. Start by calculating your essential outgoings then build up your cash reserve by diverting a fixed percentage of your business income into a savings or term deposit account to be accessed only in an emergency.
Review your overheads
When you’re busy, unnecessary costs can easily slip under the radar. It’s important to audit your expenses regularly to uncover ways of saving money. You might be able to cut the cost of utilities such as phones and electricity by switching to a new provider. You may also be able to negotiate more favourable trade terms with suppliers, giving yourself longer to pay.
Don’t over-estimate sales
It’s natural to feel optimistic about your business but over-estimating sales will play havoc with your cash flow. You could lose money by investing in resources you don’t need or be left with unsold product. Flexibility is key. If you anticipate an increase in demand, avoid locking in extra costs by renting rather than purchasing equipment and employing freelance rather than permanent staff. Creating a sales forecast (XLS, 50KB), opens in new window and keeping it up to date will enable you to build an accurate picture of your likely sales over the longer term.
Sell at the right price
One of the most challenging decisions you have to make is how much to charge for your goods or services. Too much and they simply won’t sell. Too little and your business cash flow will suffer. Your product could also gain a reputation for being ‘cheap’ and by association, inferior quality. First, calculate the actual cost of creating your product, including overheads, to find out how much you need to charge to break even. Then research your potential customers, your competition and market trends to find a balance between the profit you need and the price the market will bear.
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The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial and taxation advice before acting on any information in this article.