Get the foundations right if you want positive cash flow for your business
Cash flow is critical to keep any business profitable, enable growth, and stop it from going under. Sometimes, however, it seems easier said than done, especially when it seems at times that there’s more money going out of your account than there is coming in, writes business turnaround specialist Domenic Calabretta, CEO Mackay Goodwin.
Maintaining positive cash flow means that the money keeps moving (in and out), and you have enough coming in to cover the expenses you need to pay. To scale your business or even simply to keep operating, you must have more coming in than you do going out (positive cash flow).
A negative cash flow is when there’s more money going out on expenses such as loans, rents, stock and salaries than there is coming in from customers or clients for your products, goods or services. When you are in that situation, you could find yourself trading insolvent. It feels like you are robbing Peter to pay Paul (as the old saying goes) to stay afloat. And the sad truth is, you probably aren’t staying afloat at all.
Before you start your new business get the foundations right
Before you even start your business:
Take the time to develop a business plan.
Understand your business cash flow.
Project your income.
That means looking at your marketing strategy, expenses and also your pricing. Don’t set your profit margin low simply to undercut the competition. Instead, calculate your costs and outgoings to identify how much money your business needs to make to cover your expenses and still make a profit.
More than 60 per cent of small businesses in Australia close within their first three years, so to make sure yours isn’t one of them, it’s critical to get the foundations right.
Of those businesses that didn’t get going, 38 per cent failed because they ran out of cash or were unable to raise capital, and 15 per cent failed because of cost or pricing issues. That’s more than half of new business failures coming down to cashflow issues.
When your business is a start-up or new business, you may not have enough new customers or clients to manage many of the new start-up expenses, which can quickly kill a business before it even gets going. Ideally, it’s best to have the capital to launch your business debt-free, but if you have built a solid business plan and researched lending requirements, this is also an excellent time to consider a modest business loan that will get you up and running.
I say ‘modest’ because you may not need all the bells and whistles upfront. Look at a loan that’s just enough to get started and launch your new business while still being affordable enough to pay down as quickly as possible and build money in your account.
Once you build your business and brand, and have a steady source of income, then start thinking about what you can do to invest in growth strategies (and bells and whistles). In the early growth stages of your business, set aside as much cash as possible so you have money to cover unexpected expenses or emergencies. Ideally, aim to keep six months’ worth of operating costs tucked away.
How to stay cash flow positive
You can do a few things to maximise your chances of the business remaining cash flow positive.
Stay on top of your accounts – Reconcile your books a couple of times a week to understand what money is coming in and what is going out. There are several fantastic accounting software products on the market that are very affordable and intuitive, from simple sole trader platforms to software that grow with you from sole trader to multi-national. Invest in one that suits your needs and your budget, and stay on top of all entries. It’s critical to have more money coming into your account than you have going out. If you find it’s working the other way, consider how you can trim your costs to manage the business within your means.
Invoice regularly – If your business relies on invoicing clients, do it regularly, and make it a habit. Don’t sit on invoices until the end of the month or the quarter, and then hope all your clients pay on time. It’s far better for your cash flow to have invoices paid to meet your outgoing expenses throughout the month. And the same can be said for paying your business expenses on time.
Keep your payment terms short, and if your invoices are large, consider offering clients an option to pay in instalments, or pay a deposit and regular progress payments.
Shop around for price and quality – Whether it’s sourcing stock or buying goods or services for your business, shop around. Get the best quality you can for a price you can afford. Often you don’t need the biggest and the best.
What happens if your cash flow is negative?
If you find you don’t have enough money coming in to cover the outgoings, you could be trading insolvent. Insolvent trading is when a business is unable to meet its debt obligations when they are due and, as a result, may fall into further debt. If your business is Pty Ltd, you need to ensure it is solvent before getting into additional debt. Failure to do that may see you personally liable for any legal repercussions.
If in doubt, waste no time and seek professional advice from your accountant or a qualified business advisor, who may be able to help you create some strategies to address the debt and continue trading.
Contact us on 02 6622 2907 if you need help with your business's cash flow.
Source: Flying Solo November 2021
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