Improving cash flow.
Most small businesses experience cash flow problems at some point. Getting a loan or overdraft may seem like the obvious solution. But before you do this, it's worth investigating how you can free up cash within your business.
Scoping out cash flow.
There are many ways to free up cash within your business to improve your cash flow. Completing a cash flow forecast helps you gain a clearer picture of how long you can continue to run your business with your current cash flow. This helps you determine what action to take next. Money can be locked up in stock, assets, and unpaid invoices.
Completing a cash flow forecast.
A cash flow forecast examines the cash going out of (such as overheads and variable costs like supplier bills) and coming into or available to your business (such as sales and cash resources), typically for a 6 or 12-month period.
Completing a cash flow forecast enables you to examine your future cash position and possible best-case and worst-case scenarios.
- Download Westpac's cash flow forecast1 and complete it
- Don't forget to adjust for any seasonal fluctuations that may affect your business, and avoid being overly optimistic with your predictions
- Once you have completed a cash flow forecast, you can see more clearly the impact on your cash flow if you implement the ideas that follow.
How to free up cash from stock.
Sometimes a business can have too much money tied up in stock. Does your business stock high amounts of items you could get from suppliers at short notice if needed? Do you stock many slow-moving products but only a few top-selling products?
It's important to regularly review your stock levels, stock turnover rates and purchasing habits. Can you free up money by reducing stock levels?
- Consider having a time-limited sale of the slow-moving products. It might pay to reduce some items heavily to get money in quickly
- Consider approaching suppliers to take back excess stock you may have ordered. They might help you out as a goodwill gesture if you explain you have a temporary cash flow crisis but wish to build a long-term relationship with them
- If you need to purchase more stock, ensure you're replacing slow-moving products with faster-selling products.
How to free up cash from assets.
Assets include things like prepaid expenses, and fixed assets such as equipment, vehicles, fittings and property. Each of these is a possible source of funds.
Prepaid expenses often relate to services. For example, you might pay your entire insurance bill for the year, but you could arrange to pay small monthly amounts instead. There might be an additional cost for doing this, but this must be weighed against the advantage of small, monthly payments that your cash flow can comfortably handle versus one large, annual payment.
Consider doing the same with your electricity bill - ask to average out your electricity bills, instead of paying relatively small bills in summer and big ones in winter.
Does your business put all its assets to full use? You might be able to sell seldom-used assets, such as vehicles or machinery, and hire suitable replacements only when you require them.
If you really need to purchase an asset for your business, sometimes it may be better to talk to a business banking manager about financing the purchase rather than buying outright. You will end up paying a little more in the long run, but won't pay such a large chunk of money upfront.
Review your debtors' book.
Money owed to your business is your future cash flow so you want to get paid as soon as possible. If you allow customers to pay late, you're effectively giving them interest-free use of your money. While it may only be a minority of customers who take advantage of this, you're not in business to provide free loans.
- Send invoices with products or when services are completed, and date the invoice from that day. The earlier the invoice date, the earlier you're likely to get paid
- Change the terms and conditions for new customers and customers who have paid late before. Consider shortening their payment terms to 14 days from the date of the invoice
- Always take action when invoices aren't paid on time. Be polite but firm, and consider appointing a member of staff to this task if you are pushed for time
- Consider offering a discount for prompt payment, but first work out whether the use of money gained earlier is worth the discount you're offering.
Factoring is when you 'sell' your debtors to a finance company. Rather than waiting until an invoice is paid, you receive your money from the finance company, which, in turn, collects the money from your customer. The finance company will of course charge you a commission for this service.
Be selective when considering using a finance company, you don't want them to antagonise your customers. Always talk to any finance company you are considering about their collection methods.
Your home loan as capital.
If you have your business banking and your home loan with one bank, your mortgage can be a source of funds. Your home loan is one of the cheapest forms of capital, as the interest on a home loan is lower than that on overdrafts and credit cards.
Topping up your mortgage or reducing your payments are just some of the ways to increase your cash flow. Talk to Westpac about managing your home loan2.
Things you should know.
1 These tools are intended as a guide only and are not intended to constitute financial advice.
2 Eligibility and lending criteria, terms and conditions apply. An establishment fee may also apply.
The material on this webpage is provided for information purposes only and is not a recommendation or opinion.
The material on this webpage is does not take your particular financial situation or goal into account. We recommend you seek independent legal, financial and/or tax advice.
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