Understanding how to improve cash flow management

They say knowledge is power, and nowhere is this truer than in how well a business knows its cash flow, so understanding your cash flow management position gives you an accurate picture of the financial health of your business.

If you're making sales but struggling to get cash through the door, how can you better manage your cash flow? What are the common mistakes and what's a good system for overseeing cash flow management?

What not to do

"The major mistake businesses make is putting their head in the sand and thinking it will be all right. It won't," says Eleonora Zappia, Chartered Accountant and owner of Eleonora Zappia & Associates.

"You've got to act. You need to be on the phone to get the money in. You need to explain to creditors how you are going to pay and when. You have to be proactive."

Flying blind

Having a poor understanding of your financial position can lead to bad decision making, says Eleonora.

"If you're negotiating a contract and you're not aware of its cash flow implications - materials, extra staff, financing - it may be too late when you discover you don't have the working capital to take it on."

Getting it right

"Ongoing interest in your cash flow is the key," Eleonora says. "You must always be on the ball. Always expect the worst, have set parameters and stick to them." 

Effective strategies for improving cash flow management include: 

• New clients to pay COD until they prove themselves
• Set credit limits for clients and adhere to them
• Don't let clients get behind in payments
• Pay your bills on time, not early
• Encourage creditors to pay early, perhaps with a discount incentive
• Don't do business with customers who fail to pay

Get professional help 

Don't underestimate the benefits of employing a bookkeeper or accountant. "It frees you from processing data, gives you time to analyse the results and the information you need to figure out a way forward," says Eleonora.

But ensure you employ a bookkeeper with good credentials.

"If you're using information generated by that bookkeeper to make decisions, you want to be sure that information is correct." 

Cash flow management reporting

Basic accounting programs like MYOB let you set up job systems to allocate expenses to a single contract.

"You can then run reports weekly or monthly, or however you want to do it," Eleonora says, which gives you an up-to-the-minute snapshot of the cash position of just one contract.

How does this improve cash flow management? Quite simply, it helps you identify problems before they become serious, highlighting again the close relationship knowledge has with power when it comes to cash flow.

Get your cash flowing

With an accurate picture of where your cash comes from and where it goes, you can protect your business from financial shocks and better plan for the future. 

Ask an accountant today for advice on how to improve your cash flow management.