An effective cash flow management strategy is one of the most important concepts to master for small businesses. It’s very simple — your business can’t grow without one. Cash supplies the funds to build your brand, to stock your inventory, and to keep the doors open and the lights on. Balance Small Business estimates about 60 percent of companies that fail do so because they have cash flow problems. What does it take to conquer cash flow management and see revenue growth?
Getting Familiar with your Sales Cycle
Fbz Accounting defines the sales cycle as the time it takes for a customer to find the company, order something, and then pay for it. Depending on what type of business you run, there can be big gaps between each of those steps.
If you run a B2C bakery, for example, the only gap might exist between the customers finding you and buying something if they pay cash, but what if they use plastic? That adds time between when the product leaves the store and when you actually have cash in hand for it. It gets even more complicated when you factor in things like B2B ordering where customers expect credit terms like 180 days.
Start the process by creating a flowchart and timeline to visualise the customer journey through the sales cycle. It will help you to understand when the cash comes and where it comes from so you can compare that to your expenditure timeline. When money goes out, how long does it take to come back? Understanding the sales cycle allows you to make informed decisions about things like credit terms and inventory management.
Learn How to Forecast and Monitor Cash Flow
Forecasting is how you compare your cash in against your cash out, explains Business Queensland. Cash forecasting is typically done annually and then broken down into months.
Once you understand the sales cycles, you can make accurate predictions about the yearly cash flow and create a month-to-month breakdown. Business Queensland offers a template to show how this is done:
- Figure total monthly cash inflow — Where is the money coming in from (e.g. sales, asset sales, capital injections like a loan and interest revenue)?
- Figure total monthly cash outflow — This is the business spending to cover basics like rent, loan repayment, supplies, utilities, wages, and taxes.
- Calculate net cash flow — Subtract the outflow from the inflow to see what is left over each month.
- Record opening and closing cash balances — How much are you starting each month with and how much is left at the end of it? If you struggle to forecast cash effectively, consider working with an advisor until you master the practice.
A Monitoring Your Stock
Knowing how much you have on hand and whether you are maintaining the right amount will keep you from overextending.
Inventory that remains untouched for too long could end up as waste if it’s for food and beverage orders. At the very least, it’s working capital that fails to convert to cash. Inventory that sits for a long time interferes with the sales cycle and cash flow too. It’s money going out that isn’t coming back in.
Easy Payment Solutions
Making the payment system easy and convenient encourages fast return. Ordermentum offers an online invoicing system that is quick, practical, and end-user friendly, especially for B2B businesses that need an invoice for their records and an efficient payment method.
Cash flow management is the heart of any small business accounting system, one that is tough to master, especially for new companies looking to find their place in the food industry. Give Ordermentum a call today on 1300 336 724 to find out more about our effective payment solutions to get you started on the right track.