August 15, 2022 4:23 PM

five ways SMEs can improve their cash flow

Cash flow is one of the most important factors in running a successful business. Without it, a business can’t cover its ongoing expenses and plan for larger investments in growth. And as inflation pressures continue, with Australia’s Consumer Price Index (CPI) currently at 3.6 per cent to the March 2024 quarter, Australian businesses are facing CPI rates not seen since the introduction of the GST in 2000. Along with high interest rates and continued supply chain disruptions, various macroeconomic factors are placing pressure on businesses, making effective cash flow management critical to weather the uncertainty. 

Whether a company is looking to grow or keep its current revenue and profit levels stable, there are actions that can be taken and trends to capitalise on that will help you improve your cash flow. From regular cash flow forecasting or other initiatives that will provide a cash flow boost, taking the time to analyse your business’s operations and identify where improvements can be made will have you well-placed to operate throughout the uncertain macroeconomic environment and even take advantage of growth opportunities too. Keep reading for five ways that your business can improve its cash flow.

complete regular cash flow forecasting

Your business should ideally be proactive about its cash flow management at all times, but it’s particularly important in times of inflationary pressure. If you’re an owner or leader of one of the over 50 per cent of businesses worried about paying bills on time, regular cash flow forecasting can help set some of this stress at ease and provide peace of mind. A detailed cash flow forecast should clearly indicate your finances now and what’s coming up in the future. Three key items will be covered in your cash flow forecast:

  • Cash balance: Your starting balance for the period you are analysing.
  • Inflows: Sources of cash, including operating cash flow and any other income such as rent.
  • Outflows: Ongoing and larger one-off expenses such as bills, loan payments, stock orders, and wages.

Regular cash flow forecasting aims to smooth out your cash flow over time, so your business’s finances are stable while proactively identifying when finance problems may arise so these can be resolved quickly. Once you have your cash flow projections for at least the previous quarter and upcoming quarter, you should be able to see where there are any gaps and when these are likely to arise. Similarly, if you see periods where cash flow will be extra strong, you can plan to pay larger expenses or make investments in growth at these times.

get customers to pay faster with milestone payments and early payment discounts

Along with your cash flow forecasting, keeping track of and collecting late payments is important for maintaining healthy cash flow. According to Xero, almost 75 per cent of invoices have two-week payment terms, meaning that the days of 30-day terms are ending. While payment terms are generally shortening, it doesn’t mean that customers will pay their invoices on time.

Consider offering customers early payment discounts to address the cash flow problems caused by late payments. This addresses the time value of money, which is particularly important in an inflationary environment. The discount rate you offer will depend on your industry and the average amounts of your invoices. For example, you may offer a five per cent discount on an invoice if it's paid within seven days of the invoice date. Of course, larger businesses with transactions worth tens of thousands of dollars can provide significant savings to their customers through discounts of one to five per cent. 

For smaller businesses where early payment discounts may not be practical or services-based businesses that deliver projects in smaller stages, milestone payments can be a good option too. As the name suggests, milestone payments require the customer to pay at the end of each agreed-upon stage. As a guide, you may charge a deposit upfront, another payment halfway through a project, and the balance upon delivery of the final product or service. It’s a smart way to ensure stability in your operating cash flow while making cash flow available to produce the product or service you have sold to the customer.

reduce or delay expenses

If you’ve completed your financial projections and you’re worried about getting to or maintaining positive cash flow, reducing or delaying your expenses can help. With the help of your accountant or by simply using your accounting software, generate a cash flow statement and analyse your expenses. It’s a good idea to do this over a longer timeframe, such as one quarter or a full financial year, to understand your biggest expenses and when they are due. 

Some expenses you may analyse and reduce include business insurance, ongoing contracts for items such as advisory services and rent. The key here is letting your vendors know that you are looking at options and would like to explore how they can remain your business’s provider on a revised rate or pricing structure. Finally, tracking usage of consumables in your business along with implementing digital technologies that increase productivity can reduce operating expenses while building strong long-term systems as well. 

finance your purchase orders

Quite often, you need to spend time and money fulfilling a customer’s order before you receive payment. Options such as trade finance are a smart way to access a cash flow boost without the need to increase the size of your balance sheet by taking on more debt. Whether your business is looking for a line of credit, invoice financing linked to specific invoices and purchase orders, or extended repayment terms, look for providers with various options available. This will give you flexibility in accessing the exact finance solution you need only when it’s needed. 

sell or lease equipment & other assets

If your business uses large equipment, a dedicated space or machinery to produce your products and services, consider selling or leasing these assets to smooth out your operating cash flow. For assets that you own and that require regular upgrading, equipment finance can be a good option to reduce the upfront capital expenditure required for new machinery while smoothing out your cash flow with regular monthly repayments. Similarly, if you plan on holding your assets long-term, you could lease your equipment or space to similar businesses that may need the resources. 

Leasing your workspace or equipment is a smart way to generate income from underutilised assets. For example, coffee roasters often provide contract roasting services where another brand pays a fee to the roastery to have their beans roasted at the facility. If your business can securely offer other companies ways to use your assets without jeopardising your intellectual property, leasing your assets can provide a cash flow boost and even cover the expense of owning the asset.

embrace alternative finance solutions & boost your cash flow with moneytech

Managing cash flow can be stressful, especially when you’re unsure where to start. By reviewing your cash flow projections, you can identify which levers are available to your business that will help you strengthen your finances. Whether you simply cut expenses or look at finance options to provide a safety net or a cash flow boost, these options can give you peace of mind and the means to survive a difficult business environment and be in a strong position to take advantage of new opportunities too.   

As Australia’s only purpose-built and fully integrated business growth platform, Moneytech partners with businesses to support them with recovery and growth. Whether your business is seeking working capital to cover your day-to-day expenses or you’re looking for funds to invest in growth opportunities, we can help. Contact us today, and one of our experts will be in touch to discuss your options.

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*This information does not take into account your personal objectives, circumstances or needs. Consider its appropriateness to these factors before acting on it. Read the disclosure documents for your selected product or service before deciding whether to purchase them. ABN: 24611393554
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