Is your Melbourne business overstretched and struggling to make ends meet? Not quite sure how you got there or how you’ll get the cash necessary to dig your way out?
Perhaps, like many Melbourne businesses, you may be seeing COVID-19 impact your business’ cash flow in unforeseen ways.
Even in a strong economy, cash flow problems hit more businesses than you might think. Now, Australia’s Federal and State governments are doing all they can to create social distancing and slow the contagion of the Novel Coronavirus. Many Melbourne businesses are facing serious cash flow challenges as a result of this ‘new normal’.
Whilst many businesses will not survive, there will be those that may remain standing through this period, as long as they can better manage their cash flow.
We’re working on an article looking specifically at what Government grants and other financial options are available to help Melbourne businesses get through this challenging time.
Meanwhile, here are five general tips to help strengthen your cash flow management, during a pandemic or any other time.
1. Anticipate Future Needs
There’s nothing harder (and more disheartening) than scrambling for cash when you’re desperate. The single best way to strengthen your cash flow in the future is by anticipating your future cash flow needs.
It starts with getting on top of your financial recordkeeping. As the cliche goes, past performance can be an indicator of future success, so you need accurate financial records in order to learn from history. In order to help you anticipate future trends, you’ll need:
- Your past monthly income statements
- Your past cash flow statements
- Your balance sheets
Use these to calculate your currently available cash. Your financial planning should be based on the cash you actually have. From there, you can make projections of likely cash flow needs over the next three to six months. Use this guide to walk through the process of cash flow forecasting.
2. Borrow (or Apply for Grants) Before You Need It
This is instrumental to the next tip: borrow before you need cash flow, not after you’re in trouble. The time to solve a cash flow problem is before it happens. If your business is running smoothly now but has projected issues in the next several months, borrowing now will keep the show rolling and help reduce bumps in the road.
If you qualify for some of the Federal and State Government grants, apply for them as soon as you can. (Keep an eye out for our next article, reviewing the grants and other strategies that we’re recommending for clients during these extraordinary times.)
Plus, if you open a credit line when your business numbers are good, you may avoid the risk of rejection and possibly secure superior rates than if you waited.
When applying for a credit line, try to apply for double what you think you need. You might not get it, but even if you only get half, you may still have what you need to brave the weather. And if you get a bit extra, that’s alright – the extra can be your reserve funding in case of surprises.
3. Restructure Payment and Collections
Payments and collections are the ebb and flow of cash in your business. By restructuring them, you can take more control of your cash flow.
One way to do this is by shifting up your vendor payment dates ahead of when collections are due. This functionally can transform your vendors into lenders so that you may access new cash flow without opening a credit line (or as large of a credit line).
If you can’t restructure payment dates, think about restructuring your costs, i.e. replacing current vendors with new vendors who have lower costs. Also, you can create leverage from competitor prices to get better pricing from your existing vendors if you need to, especially if you’re not keen on replacing your current vendors.
4. Train Your Customers
Along similar lines, you should aim to retrain your customers to pay at a time that’s more effective for your business. Your goal with customers is the same as with vendors: you want the payment to come in before you incur the cost of delivering on the product.
Ideally, you should shoot for payment on delivery – or if possible, before delivery. However, this isn’t possible for every business. If you can’t manage COD, invoice customers the day after you deliver the product, with a note informing them that payment is due upon receipt of the invoice.
Whatever you do, don’t offer an option to delay payment. It’s more convenient for others to wait until they’re paid, which means they’re more likely to delay payment if you give it as an option. The solution is simple: don’t give it as an option.
More to the point, give customers an incentive to avoid delaying payment. You might factor in a small discount if payment is made within your desired timeframe. Alternatively, you can let customers know that interest is charged on all payments later than 30 days and that you will initiate collection procedures if they don’t pay. This also requires you to stay on top of your aging accounts receivable, but you should be doing this anyway in order to keep accurate financial records.
5. Monitor Where Your Money Goes
Finally, monitor where your money goes, even if you aren’t using that data to make future cash flow predictions.
We said earlier that you should borrow before you need cash flow. We stand by that statement, but we do advise clients to monitor cash flow with extra care any time they take on new debts. Lending can help you coast through rough waters, but borrowers can also drown in debt in good times if they’re not careful.
We encourage clients to have a strategic borrowing plan so that they can borrow money with a realistic repayment schedule in place.
On a similar note, it’s important to be strategic about monitoring your savings. Keeping a close eye on your capital can help you be strategic about leveraging your savings instead of taking on new debt.
Mastering Cash Flow Management for Your Business
We know that mastering cash flow management is no small feat. But it is possible. And we’re here to help Melbourne businesses like yours make it happen.
We provide personalised advice on SME financing because we know that cash flow is the lifeblood of your business. Whether you need to seize a new opportunity or just last through unexpected downturns, we’re here to help your business leverage your money and stay competitive.
See how our insights could help you identify suitable cash flow strategies for your Melbourne business. Get in touch today for an introductory consultation call that’s tailored for your situation.
We’ll explain what could work well for your business and give you the rundown on how we could help. Then we’ll leave it up to you to decide whether we’re a good fit and how you’d like to move forwards.
Disclaimer: This article provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances.