5 Steps to Plan Your Cash Flow


5 Steps to Plan Your Cash Flow

I was talking to a mortgage broker today, and she was telling me how business owners don’t seek finance until the last minute when they’re in a bind.

You know the situation, everything’s going fine, and then the delayed receipt of payment invoices throws your cash flow into disarray. You’re left without the funds to pay wages, rent, Australian Taxation Office (ATO) and all the other costs and commitments you’d made. And for some, the next step is an emergency call to obtain short-term funding, an overdraft facility or other finance.

See how well you understand your cash flow by checking the pressure in your business with the Business Barometer.

It doesn’t need to be like that if you just put in place a few checks and balances and watch your figures regularly. I recommend following an easy process to plan your future cash flow.

Step 1. Identify what money is outstanding and when it is due.

This does require your accounting records to be up-to-date. With online accounting systems like Xero, there’s absolutely no excuse not to have accurate figures at your fingertips. You should be able to look at your accounts receivable (or debtors) report at any time and know that the information is correct.

Once you’ve got the report, identify all your clients or customers who have invoices outside your payment terms and get on the phone and ask for payment. If you don’t want to do it yourself, find someone to do it for you or engage the services of a debt collection company.

The aim is to firstly get the money owed to you in your bank account, and failing immediate payment of outstanding invoices, an undertaking from your client or customer about when they will make the payment.

Step 2. Look at what payments you owe and when they are due.

The opposite of your invoices you’ve issued to clients or customers are the bills you’ve received from your suppliers that you need to pay. Look at your accounts payable (or creditors) report and identify what is overdue, what needs to be paid urgently and what upcoming costs need payment in the next couple of months.

Beware though, that there are costs that you will be paying that won’t be on the accounts payable report, for example, rent, wages, superannuation, ATO payments, loan repayments or credit card payments. Consider these items too and identify when they need to be paid.

Step 3. Check for shortfalls.

Once you’ve got your list of money you’re due to receive and when, and the list of payments you need to make and when, put the two together on a spreadsheet with a column for each week. Create totals for the money to be received each week and the payments you’ll make each week to identify which weeks will have a shortfall.

Step 4. Have a Plan B for when funds are short.

Now that you’ve identified the weeks when you have a shortfall, what action can you take? Is it possible to delay some payments for a week or two? Do you need to put in place payment arrangements with suppliers where you pay a bit off the amount each week, fortnight or month and clear the debt over a period of time? Or is it appropriate to consider putting in place an overdraft facility, or invoice financing or other finance to help you deal with the shortfall?

Step 5. Create a buffer.

Ideally what you want to do is to create a buffer. A balance in your bank account that is sufficient to pay all the bills for a month is a good starting point. Three months’ worth of costs is ideal and a goal to aim for. But when cash flow is tight, working toward that first months’ costs as a balance is a great place to start.

Seeking finance to support your business is not a bad thing, it’s just tough to do when your business is in crisis financially. Not only are you stressing out about how to pay the bills, but the figures you’ll be showing the bank or finance company won’t be ideal for them to want to lend to you. Better to apply for finance when the figures are good.

The process I’ve described above is best undertaken over a period of time, just like Sharon has. Six months ago, she had money owing to the ATO, superannuation, multiple suppliers, a business loan at exorbitant rates and so on. Sharon was stressed out, worried about how she would ever get it together and be in a position where she was on top of the bills. Fast forward to today, and she’s now in a position where she’s paid off the majority of the bills. The timing is right for her to seek finance for the business to help fund the business growth.

When you think you may have cash flow issues, that’s the time to talk about seeking finance.

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