Five strategies to support your cash flow management

Do you ever feel that trying to forecast and manage your cash flow is akin to gazing into a crystal ball? The future holds so many variables – especially now – that accurate cash forecasting seems an impossible task.

Here are five strategies to help tip the cash balance in your favour, and to support the growth of your business.

1. Bite the bullet and get that forecast done

Cash forecasting is much more difficult than profit and loss forecasting, because in the latter case the timing isn’t as crucial: a predicted seasonal loss in one month can be offset in a later period, so that the half-yearly or annual budget still looks good. But get your cash flow seriously wrong at any single point, and the wheels can start to fall off if you don’t have flexible financing available. You need a cash flow forecast, however inaccurate you may think it’s going to be, because without it you’re flying blind.

2. Cash flow forecasting guide

Once you have a month-by-month profit and loss budget as a starting point, you can use your forecast sales, adjusted for your debtor payment terms, to predict your major cash inflows. Add any other inflows, such as asset sales, loan repayments from borrowers, term deposit maturity, grants, royalties and additional equity input.

Now calculate monthly outflows, including finished goods or raw material inventory purchases (adjusted to meet forecast sales and your creditor payment terms), wages and other expenses, capital expenditure and loan repayments.

Open the forecast with your current bank balance, and use monthly cash inflows and outflows to predict closing cash balances for each of the next 12 months. Update on a rolling basis.

Zero in on those months where cash flow will be strained or in deficit, and prepare to improve your inflow or reduce your outflow using the following techniques.

3. Balance your debtor and creditor terms

One of the easiest ways to make sure your cash inflows cover your outflows is to align your payment terms. Get your debtors to pay you at the same speed as you are required to use when paying your creditors, to avoid having a gap between receivables and payables.

Australian subsidiaries of major Japanese manufacturers, for example, often sell products to a variety of customers, from household appliance retailers through to heavy industry and utility companies. Their payment terms for appliance retailers might be 30 days, but 90+ days for heavy equipment buyers, simply because these are direct reflections of their own creditor payment terms when importing different types of products from their parent company.

4. Reduce your outflows

You’re likely to have more control over your outflows than your inflows. That is, fixing your cash flow problems by increasing sales is more easily said than done. But you can contain your expenditure much more quickly and predictably, especially:

  • Discretionary expenses such as entertainment and gifts
  • Deferrable items such as capital expenditure (perhaps leasing assets instead)
  • Expenses where discounts are available from suppliers for early payment or bundled orders
  • Wages costs, by matching staff hours to seasonal demand, and using casuals where appropriate
  • Inventory costs, by improving inventory management to aim for just-in-time supply.

5. Increase your inflows

Although increasing sales is always the preferred option for business growth, it may not be possible in the short term. But there are other ways to increase cash inflow:

  • Clear slow-moving and obsolete stock for a cash injection and to make way for items that turn over faster
  • Reduce credit terms granted to debtors, especially if they are more generous than the industry standard
  • Improve your debtor collection system by performing new customer credit checks, issuing invoices promptly, offering early payment discounts, setting up automated payment reminders, and making it easy to pay by credit card
  • Ask for a deposit upfront when you take an order.

Need help?

Bentleys understands the cash flow challenges business owners and leaders are facing. We encourage you to call us to discuss how our experts can help you to manage and improve your cash flow to facilitate business growth. Contact your local Bentleys advisor today.

Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.

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