With the cost of doing business continuing to squeeze the bottom line, careful cash flow management has never been more important.
Not only is the ATO paying extra attention to timely payment of tax debts, but once the new payday super rules commence, many small businesses will no longer have access to one of their traditional sources of emergency funding.i
The government recognises how important cash flow is in small businesses and allocated an additional $23.3 million in the May 2024 Federal Budget to boost the adoption of eInvoicing. This electronic system is designed to help improve cash flow and productivity in smaller operations.
If you don’t have clear insights into your cash flow position and are not careful in managing income and expenses, it’s much harder to pay your bills and meet your tax, super and employer obligations.ii
A cash flow projection or budget helps to ensure there is enough cash available to meet upcoming expenditure. You will be able to understand your likely cash position at any time, identify fluctuations that could lead to potential cash shortages and plan for tax payments and major expenses.
The three main things to consider when creating a cash flow budget are timing, fixed and variable costs, and your income.
While cash flow projection tools can be off-the-shelf digital products or simple templates, we can also work with you to use the ATO’s Cash Flow Coaching Kit to improve management of this critical area.iii
Improving your position
When you have completed a cash flow projection and understand your position, it is time to work on ways to improve it.
One of the most important ways to improve cash flow is to ensure your invoices are paid as quickly as possible. Make sure invoices are sent out as soon as you can and, if possible, ask for immediate payment.
Consider shortening your payment terms, particularly if they are currently longer than 30 days. Some businesses offer an early payment discount or charge interest on overdue accounts to help speed up payments.iv
Setting clear payment guidelines for your customers is also valuable and think about taking action with customers who regularly fail to pay on time.
Review your payment cycle
Check suppliers’ payment terms to make sure you are not paying earlier than required (unless there is a discount on offer!).
Using a business credit card with an interest-free payment period can be an easy way to smooth your cash flow.
Separating your personal and business expenses makes tracking your business cash flow and expenses easier and reduces the time required for reconciliations.
Check stock levels
If you sell or supply products, carry out regular reviews of your inventory to ensure you are only holding the stock needed and are not tying up valuable cash flow and possibly increasing storage and insurance costs.
An inventory management system can be helpful to automate ordering and reduce lags between placing and receiving orders, and to identify unwanted or outdated stock.
Also review your pricing and margins to see if it is possible to raise prices without losing business.
Reduce your outgoings
Keeping a close eye on regular expenses and one-off spending helps to keep outgoings to a minimum.
Look for opportunities to save money by streamlining operations and reducing operating costs by cutting energy expenses and reviewing existing service contracts including phone and insurance.
Negotiating better prices with suppliers and more tightly targeting marketing expenditure can also boost your cash flow.
Make your asset work harder
If your business includes expensive assets like vehicles and equipment, ensure they are working hard for you.
Consider leasing or hiring assets to reduce upfront costs, sell assets you no longer need, and review any asset financing to make sure that it is competitive.
While these general tips may help improve your cash flow position, don’t forget we can provide advice tailored to the specific needs of your business. So, call us today if you would like our help.
i Payday superannuation | Australian Taxation Office (ato.gov.au)
ii Manage your business cash flow | Australian Taxation Office (ato.gov.au)
iii Cash Flow Coaching Kit | Australian Taxation Office (ato.gov.au)
