Cash flow tips

Well-managed cash flow is when your business has enough money on hand to pay its bills and expenses. Here are some ways you can manage your cash flow to keep more money flowing into your business and what to do if you find yourself short.

1. Monitor your cash flow

Prepare annual, quarterly and monthly cash flow projections and closely monitor your operating expenses, overheads, stock levels, debt collections and profit. Your accountant can help review your cash flow to highlight areas you may have overlooked, and plan for potential cash flow problems.

2. Tighten payments

Receiving payments faster will boost your cash flow. One of the easiest ways to speed up your payments is to send invoices immediately after the delivery of goods or services. You may also want to consider shortening payment terms, or the time window you give your customers to pay you, particularly if they are longer than 30 days.

A mobile EFTPOS device can give your customers an easy way to pay on the spot no matter where you are, removing invoice time lags.  

3. Stick to terms of trade

Set out clear payment guidelines for your customers and consider reviewing your supply terms if a customer regularly fails to pay on time. You could also think about offering a discount for early or prompt payment (e.g. 2% off the total amount due) or perhaps a penalty payment or a late payment fee on overdue accounts.

4. Know your customers

Your customers, especially if they are businesses, will have different payment habits. Some pay everything on the same day each month, while others pay on an ad-hoc basis.

It's worthwhile getting across the payment practices your customers use so you can factor this into your cash flow planning.

Having your customers' payment history and habits can give you more control over your incoming revenue, here are some steps that could help:

  1. Complete a credit check on new customers
    • Assess whether you have adequate reasons for a credit check, such as offering credit to customers
    • Request the appropriate authorisation from your customer to complete the check
    • Get in touch with New Zealand credit reporters - Equifax, illion or Centrix to organise the credit report
  2. Agree payment terms for new customers when you set up their account
  3. Review existing customers regularly and be prepared to change their credit rating

5. Utilise payment terms

Similarly, understand the payment terms of your creditors to improve your cash flow. For example, if a payment is due in 30 days, don't pay it in seven days unless there is a discount for early payment. This will help you keep money in your account for longer.

Using a business credit card to pay suppliers can be an easy way to manage cash flow. Take advantage of interest-free payment periods whilst accessing spend-based rewards such as ASB True Rewards. Just make sure you can pay your closing balance in full at the end of each month to avoid interest charges.

6. Separate accounts

Separating your personal and business finances can make it easier to keep track of your business cash flow. It will also keep your expenses separate, saving you time and money when the time comes to prepare your financial statements or tax returns.

Opening a separate business savings account may allow you to earn interest on your cash while still leaving funds accessible when you need them.

7. Review inventory

Excess stock can tie up cash and increase storage and insurance costs.

  • Avoid tying up large amounts of cash in stock
  • Try to balance stock levels so you have enough to satisfy customer demand
  • Consider ordering less stock more often and make 'just in time' arrangements with your suppliers

8. Cash crunch management

Cash shortfalls can happen to any business, and a credit facility such as an overdraft can help cover operating expenses temporarily. This can be an effective way to meet short-term working capital requirements when cash flow is low. If used wisely, the interest should be relatively low because the business only pays interest on what it borrows for a short period.

If you need to make a larger purchase, a business loan can minimise cash flow impacts and provide flexibility.

Your local Business Manager can help answer questions about things you need to consider, such as fees, interest rates and payment terms.

9. Budget your spending

If you're a start-up, it can be easy to overspend as you try to make an impact. Keeping key jobs at the top of your list of things to do can help you prioritise things such as launching or promoting your business. Thinking about the cost and the relative benefit it might bring can help you assess what you need to do and what might be an 'impulse spend'.

A business budget can help you to keep cash flow healthy, because you'll know what you can afford to spend, and when. Setting and monitoring a budget will also encourage you to review your spending so you can make sure it's as efficient as possible.

10. Create an emergency fund

Creating an emergency fund for your business, in the same way that you might for your personal finance, can help you be prepared for any unexpected expenses.

Cash flow warning signals

  • Your suppliers go unpaid for more than 60 days
  • You regularly have disputes with suppliers or change suppliers
  • Your employee KiwiSaver payments are in arrears
  • Suppliers insist on cash-on-delivery

If you start seeing any of these cash flow warning signals in your own business, consider implementing some of the cash flow tips above, or speak to your accountant or your bank.

Keep reading

What's next for your business?