7 Cash-Flow Management principles to avoid a Cash Crisis

The Cash Crisis – That sick feeling when there’s not enough Cash to pay the bills.

Have you ever asked, “If my small business is making a profit, why do I never have enough cash?”

I certainly did in the early years of my landscaping business.
It felt like a hole I couldn’t climb out of.

I tried working harder, longer, faster – taking on more jobs.
But that led to exhaustion & frustration.

I remember when that sick feeling came – every quarter when the staff’s PAYG & Superannuation was due.

I remember getting angry when the Tax Accountant told me how much more tax I had to pay. Like to literally hand over more cash, to pay the tax due on my “successful” little business.

The Cash-Flow Solution – Power to control my own destiny.

That all changed, when I started to apply some fundamental cash management principles. Principles I’d learnt years before at university. Wow, not a waste of time, thanks Mum & Dad.

Those cash management principles started working. It really was working!

Of course, it didn’t happen overnight.
But even within a few weeks it started making a difference.

In a couple of months, I had savings for bills. I had money set aside for taxes. I had enough cash to pay wages and the employee’s taxes & super.

As the weeks rolled on, by sticking to the strategy and commitments I had made to myself, the power to manage my own destiny began to grow.

And the sick feelings started leaving.

7 Cash-Flow Management principles

So, what are those secret Cash Management principles?

To be honest, it’s not that secretive. We all just need a reminder that these simple and age-old principles really do work.

1) Get & keep your accounting records up to date.
It’s nearly impossible to know what steps to take if you don’t have a good handle on where you are at, financially.

It’s not enough to have a good gut feel for how much you are owed, even if they haven’t hit 90 days yet.
It’s not enough to have a manilla folder of all your unpaid bills, even if they are in due date order.

Good accounting records are not just for recording the past and your Accountant to use at tax time.
Good accounting records will help to effectively manage your business and its Cash-Flow.

a. Reconcile all transactions to bank statements, at least twice a week.

b. Keep Sales & Purchases transactions updated, at least weekly.

c. Create a Cash-Flow Management report & get into the habit of running it every week.  This will be an incentive to keeping the numbers up to date. Not to mention become your best friend looking forward.

2) Identify what’s yours to spend & what’s not.
One of the biggest mistakes small business make is using money that is not theirs, to survive on a weekly basis.

This trap is a bottomless hole that often causes a Cash-Flow Crisis.

If a business consistently needs these cash flows to survive, there are other underlying fundamental problems (see step 6).

Often the beginning of Cash Management Wisdom is to recognise & accept this fact.
The next step is putting this money (other people’s money) out of reach.

a. GST – is not yours to spend.

b. PAYG withheld from staff wages – is not yours to spend.

c. Super (now 10% of wages from 1st July 2021) – is not yours to spend.

3) Create separate savings accounts.

The idea here is to put some money in savings and out of reach.

Start now. Even with just a little. Start parking a little bit away into each of those saving’s accounts. Do it at least weekly. Make it a habit.

Use Interest Offset bank accounts if you can.

Of course, you will still have to pay bills as you build your Cash Working Capital – but don’t touch these savings accounts – not just yet.

Wait until you to get enough money in the savings accounts to cover at least 6 weeks of regular running costs.

a. Bills Savings A/c

b. Taxes and Super Savings A/c

c. Projects Savings A/c

4) Send your sales invoices out instantly.

Cash is the critical lifeblood of small business. It takes commitment & good processes to keep it moving in the right direction.

How often do we work hard all week, to then catch up on invoicing late at night or on the weekend?

These days, it’s not good enough to send out invoices to clients once a week. If the job is done, the goods or services supplied; then the clock is ticking to receive the reward. Don’t give your customers 7 days free credit. They will get used to it.

Accounting Technologies today help. Making it possible for all businesses to create invoices immediately, straight after the job is done.

a. Prepare & send invoices to customers directly from within your accounting system.

b. Add a Payment Service to your invoices – they’re not expensive.

c. Know when every one of your invoices are due using weekly Aged Receivables reports.

d. Follow up immediately if invoices are not paid by the due date.  Consistently communicate to your customers that payment is expected ‘on-time”. And more likely, pay on-time they will.

5) Manage your Bills in an Accounts Payable system.

Having all your bills in an Accounts Payable system is not just for bigger businesses.

Small businesses can obtain huge benefits from having a good handle on purchases & expenses. Remember, it’s not good enough to have all your bills in a manila folder, even if they are in due date order.

Having all bills, particularly recuring bills, recorded in your Accounts Payable, is essential for good Cash-Flow Management. It’s also essential for enabling that new friend of yours; the Weekly Cash-Flow Management report.

There are also huge time saving benefits.

Time savings in reconciling when the bills are already processed.
Time savings in paying bills by ‘batch processing’ – enabling multiple bills to be paid in one process. This is a significantly under-estimated time saving tip for small business.

a. List all your recurring bills – short, medium and long term. And get them into a payment management system – Accounts Payable.

b. Create recurring transactions for those recurring bills.

c. Don’t forget to routinely pay yourself and your Super.  I know it can be difficult in small business. Start small at first. It will grow.

6) Analyise Income & Expenditure for Profitability before it’s too late

Applying each of the above principles will enable a profitable business to get out from under a cash-flow crisis.

Applying the above principles will also enable a profitable business to create a worthy “cash working capital” balance. A balance that can then enable growth and help a business to thrive.

A Cash-Flow Crisis can however, be an indicator that current business activity is not making a profit.

The crisis point can take time to manifest itself, particularly where a business is using other people’s money to get by. You can survive one quarter or even the next; but it will quickly get worse.

It’s not rocket science.
Revenue is not covering expenses.
Moreover, Revenue is meant to cover Expenses AND create a Return on Investment for the Owner (on top of Owners Wages).

The solution lies in increasing sales or prices &\or reducing expenses.
A detailed review of business profitability is required & soon.

a. Review the current Profit & Loss reports.

b. Review Sales Turnover & Pricing of goods or services.

c. Review purchases & expenses.

d. And also, review Owners Drawings.  Sometimes funds are regularly taken out of small businesses by owners thinking the business is doing better than it actually is.

7) Get some practical, professional & experienced support.

The very successful American industrialist, Andrew Carnegie, once said –
“No [person] will make a great leader who wants to do it all [themselves].”

Having had a successful small business for a long time myself, I am very much aware that success is a team effort. Having the right people in the right places and acknowledging the important roles they play, is one of the keys to success.

As business owners, we are often encouraged to “work on” the business, rather than ‘work in” it. This means seeing the bigger picture, managing and looking outwards, towards the opportunities for growth & success.

If you are struggling with Cash-Flow Management, I can relate to what you are going through. It can be all-time consuming, juggling the priorities of managing the business and keeping the books.

I offer these 7 Cash-Flow Management principles in the hope that they serve you well.

I also encourage you to get some professional support.

Ideally your Accountant or Bookkeeper should be well placed to support you.

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Contact iKeepBooks with the details below.