Managing Cash Flow in a Business: How Well Are You Doing It? (2022 Guide)

Your company’s cash flow is its lifeline. Poorly handled, it can affect your company’s profitability and stability. Therefore, it’s crucial to keep a close watch over how cash flows through the company. According to a common belief, 60% of companies that fail are still profitable but have run out of money. Even if you have a highly lucrative company, poor cash flow management will always mean it will run out of money and be forced into liquidation as a result.

First steps to good cash flow

Knowing whether a company’s cash flow is secure, sustainable, and capable of managing expenses while also ensuring that there is enough money coming in to pay future expenses should be the first objective of every business.

• Recognise how much working capital the company needs to function.

This only means that you must keep track of all supplier invoices that you receive so you can determine how much money you will need to pay each month.

• Do you own sufficient working capital?

The next step is to make sure there is enough cash on hand to fund your business after you understand how much working capital is required to survive. In an ideal world, you would aim to have enough money in the company’s bank accounts reserved to pay for all expenses for three months, assuming no new revenue is generated. This is a failsafe way to ensure your business can survive for at least 3 months if unforeseen circumstances arise.

• Plan ahead.

Accurate future forecasting is the next step. Every industry has down times for businesses, and it’s critical to consider these times when less revenue is coming into the company when assessing the cash on hand.

• Try to minimise cash conversion cycles.

180-day cycles are common in business, but in the contemporary business environment, that may be too long to maintain a sustainable cash flow. Regular payments from consumers improve cash flow. Therefore, well-run firms attempt to sign their clients on subscription or retainer terms, or at the very least, require a deposit for work agreed to.

How to improve cash flow

Maintain a cash flow forecast: A cash flow forecast is a report that breaks down your company’s income and expenses by week, month, or even quarter for a specific time period. It enables you to quickly determine when there will be a surplus or deficit of funds in your account, assisting you in scheduling when to make payments for expenses.

Establish a positive business relationship with your creditors by consistently making payments on schedule. This makes it more likely that lenders will be willing to work with your company if you are in a tough time and need a bit more time to make payment.

If you would like to learn more about managing cash flow for your business then please contact Australian Insolvency Services. Our expert team will assess your financial situation and make recommendations based on many years of knowledge and experience to identify the business debt solution that best suits you. Our 24/7, toll-free hotline is 1800 210 073.