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Tips on How to Avoid Cash Flow Crisis and Improve Business Profitability

Posted by Melinda Stevenson on 12 November 2020

According to Australian Bureau of Statistics over 300,000 small businesses are launched in Australia every year. Out of all the new small businesses launched, about 50% fail within 3 years.

One of the big challenges of business owners is a lack of cash flow. It is critical to get the money you have earned coming in from customers to meet your expenses if you want your business to stay afloat.

 

 

Here are the top 3 causes of business failure according to Australian Securities and Investments Commission.

 

7 tips on how to avoid cash flow crisis

Here are some handy tips to help get you started so you do not experience a cash flow crisis which could stop you from achieving the dream you have for your business to succeed.

1. Make it easy for customers to pay you.

In order to get paid on time it is absolutely important to have a system in place that makes it easy for your customers to pay you. It can be as simple as making new customers aware of your payment terms.

If you need to be paid within 14 days to keep things running smoothly in your business, let your customers know about it upfront.

2. Use technology to help you.

Check that your invoicing system clearly shows the payment terms and let your customers know how to pay you. For example, make sure you include bank account details or other payment options on the invoice.

For example, tools such as Xero accounting software integrate with payment platforms that allow customers to pay using credit cards or through services such as PayPal.

Once an invoice is sent, make sure you can easily check your system when it is overdue. Send reminders to customers when a payment is not received by the due date.

3. Plan and monitor your cash flow.

Most businesses go through a cycle of highs and lows. Some months can be particularly lucrative while other parts of the year are more challenging.

Check through your sales and expense history to look for patterns. For example, you may find there are specific times of the year when cash flow becomes tighter. It could be due to the weather or ongoing expenses such as the end of the financial year or some other factors.

4. Build-up a cash reserve.

Once you understand what time of the year the business is most lucrative and when things are expensive for your business, you can plan to set aside some money so that you do not get caught being short on cash flow during the financially tighter months.

5. Prepare for unexpected expenses.

Unexpected expenses can badly impact the chance of survival of a small business. You could consider adding 20% allowance to your expense forecast so you can set those funds aside in case you unexpectedly need to replace an important business equipment or you suddenly lose a key customer or some other unforeseen situation comes up.

6. Do financial forecasting monthly.

Forecasting involves both planning and reviewing. Set aside some time every month in your calendar to revise your forecast for income and expenses so that you know what is coming up for the business in advance.

7. Improve your financial skills and get business advice.

Many owners especially in the early stages of their operations struggle to understand their business financials. By expanding your knowledge and business financial skills it can help improve how you manage your cash flow and business finances.

Consider improving your business knowledge and get advice from an experienced accountant or business adviser.

When to seek help from professional services and business advice?

Unfortunately, business owners tend to seek professional advice when they are already in a seriously tight cash flow position. For example, when financial mismanagement has led to a large debt with the Australian Taxation Office. It could be when the ongoing poor business profitability has resulted in the owner feeling as if they are backed into a corner. At this point external advice can help you save your business.

However, business advisers can be most useful before any big problems come up. In this situation, the business can take advantage of identified opportunities. The organisation has the available resources to implement the suggested changes that the business advisers may provide about the way your organisation could improve its operations.

For a small business to function well, the organisation has to have a team of professional advisers that they can turn to for help regularly. Finding an accountant and other professional advisers you can trust should be a part of the organistation's ongoing business operations process not only during its start-up phase. It could help you prevent making costly mistakes that do not have to be undone later.

It is beneficial to have a team of professional advisers that you can contact for all sorts of advice about running your business. Professional advice should be unbiased. By having professional advisers that are removed from your business, they do not have any emotional ties that could interfere with their judgement.

It can be invaluable help in growing your business by having someone you can talk to when making key decisions. Perhaps you need an adviser to simply check in with on a regular basis to hold you accountable for achieving your business goals.

Business advisers can help keep your organisation to stay on track in completing tasks so you can focus on working on the business instead of working in the business.

Does your business need some additional funding?

There are 6 main indicators that a business may need some additional funding.

  1. You are experiencing the growing pains that come when expanding a business.
  2. If you are turning away new business because you have no resources such as additional staff to service extra customers.
  3. When the current business funding you have in place reaches its limit.
  4. If your business is not able to meet its financial commitments such as not having the funds put aside for GST to pay the Business Activity Statements when they fall due.
  5. You cannot meet customer deliveries on time due to low stock levels.
  6. Due to slow paying customers, the company is experiencing cash flow pressures which require using the owner's personal funds to meet the business expense shortfall.

What are the different types of business financing available?

There are many different forms of funding and there are various types of financing available to the business. There are short-term options such as bank overdrafts and credit cards.

However, due to high interest rates and expensive bank fees it can make monthly repayments significant. Traditionally, small businesses find it challenging to secure funding through established lenders such as banks.

It is changing due to the rise of alternative lenders such as Capify. Capify can provide quick access to funds so the organisation can capitalise on opportunities that come up to grow the business.

Discover how you can boost your business finances within 24 hours*.

How to improve business cash flow and improve profitability?

Here are some tips on how to improve your cash flow and the profitability of your business.

Consolidate debts or existing loans

Try to consolidate any multiple debts or existing loans. It can help in improving your cash flow as you could cut down the amount of interest you are paying on various debts such as loans and credit cards.

Assess the best option for your business based on your specific situation. It may require you getting some advice from a relevant business professional or adviser as to what will work best for your situation.

Improve business profitability

It may be tempting to stock up on items you need to run your business when they are on sale. The trouble is, when you invest in things such as equipment, technology or other inventory, that value gets locked into something you may not be able to use for some time.

In this situation, while your organisation may be well equipped you do not have the liquid cash to operate the business. If there is a special deal available, perhaps buy an extra one month's supply. But do not get carried away and purchase one year's worth of items.

By closely monitoring and controlling the amount of stock you buy, you avoid allocating a lot of cash into something that you may not be able to sell immediately.

Do you need funds to sustain and grow your business?

You could be eligible for a business loan of $5,000 up to $300,000 with finance available for any business purpose. To get started in giving your business the boost it needs and to grow it, follow these 4 simple steps to receive the financial help you require immediately.

Step 1. Check if you qualify in 60 seconds.

Complete the online application to check your business eligibility without affecting your business credit score with $0 application fees.

Step 2. Complete your loan application.

Provide some information about you, your business and the necessary documents.

Step 3. Decisions are made within 24 hours.

Your application will be reviewed and you will receive the decision within 24 hours.

Step 4. Your funds arrive.

Once you agree and sign the agreement the funds could be deposited into your bank account on the same day.

Find out how you can boost your business finances within 24 hours*.

* Disclaimer: Subject to Capify's standard credit assessment and approval criteria.

Conclusion

To summarise, it is important to focus on the financial position of the organisation to improve business profitability. There are various initiatives you can implement to meet the ongoing business operations.

It is beneficial to seek relevant professional services and business advice specific to your organisational needs. It is also helpful to know when you may need additional funding for the business to give you some peace of mind.

The additional business funding could help in ensuring that you can survive the fluctuations in your income and expenses during the year. It can also help you to stay on track in growing your business.

Want More Free Resources?

For free Business Essential Guides with tips and free checklist templates, click here.

For free Business Health Check reports in a range of areas and some questionnaires only take 7 minutes to complete, click here.

For free calculators that could assist you to stay on top of your business if you want some quick help, click here.

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Research Sources and Acknowledgements

The Australian Small Business and Family Enterprise Ombudsman and Scottish Pacific Business Finance
Australian Bureau of Statistics
Australian Securities and Investments Commission
Capify

Disclaimer

This article is not intended for use as a source of legal, business, accounting or financial advice. All readers are advised to seek services of competent professionals in legal, business, accounting and finance fields. This article contains general information only.

Dynamic Zenergy is Capify's Small Business Affiliate Partner. We will receive a commission if you use Capify's services using our online application form at no additional cost to you.

Author: Melinda Stevenson
About: Dynamic Zenergy provides specialist business advisory consulting services. Our mission is to help in accelerating the growth of small to medium-sized organisations to maximise return on exit planning by using software automation and improving processes.
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Tags: Business Finance