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How small businesses can manage cash flow in a crisis

Cash flow is the lifeblood of every small business, and in times of crisis, it’s essential to do everything you can to understand, conserve and manage it.

How small businesses can manage cash flow in a crisis
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  • Contributed by Greg Charlwood
  • June 26, 2020
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I’ve had many conversations with small-business owners over the years, and I’ve come to the conclusion that one of the most valuable things any small-business owner can do to build and manage a sustainable business is to invest the time and effort to get at least a basic understanding of financial statements. Small-business owners who do and are able to use them as a tool for managing cash flow will be in a much better position to ride out crises and the inevitable ups and downs of running a business.

Investing the time and effort to understand your business’s balance sheet properly will give you a better understanding of the mechanics of what makes your business function. This includes undertaking a line-by-line analysis of all your outgoings and incomings, whether costs are within budget, what’s working well, what needs improvement, and so forth. Financial records can also identify problems at an early stage, which can then be rectified before they become much larger issues.

Scrutinising and understanding your ongoing business costs is also essential. Review your existing staffing, finances, spending and cash-flow position, and make sure you know where you’re spending money, and if it’s absolutely necessary.

Re-examine your supply chain and whether there are opportunities to negotiate and reduce the baked-in costs of running your business. Maintain open lines of communication with your business banker or non-bank lender, and talk to your suppliers about whether you can get an extension on payments or better terms. Make sure you understand who your major customers are and who their customers are, and check for any stresses on their business and their ability to pay.

Understand your debtor days and the time it takes for your invoices to be paid. Sluggish cash flow by slow-paying customers is a chronic problem and a primary cause of cash-flow interruptions for many small businesses.

Review your existing budget assumptions, and try and forecast the impact of a crisis on your cash flow, revenue, and profit and loss than you’ve ever been used to before. Assess your capital expenditure plans, and weigh carefully the tax deductions for instant asset write-offs against your need for managing shorter-term cash flow.

Consider carefully any existing debt, and your ability to service that debt, and whether you need a new approach to debt servicing, such as bringing cash flow forward with invoice finance. Remember that anything that you can do to increase the holding of cash on your business’s balance sheet can help buy you valuable time and help insulate your business during a crisis.

Many small-business people are very busy working in their business, and often find it hard to make the time to work on their business. If you don’t have a business adviser, it’s worth seeking out someone who may be able to see issues with your business and potential opportunities you can’t necessarily see for yourself.

It’s also important to make the most of any ongoing government support. Work with your accountant, small-business banker or non-bank lender, finance broker, lawyer or business adviser to ensure that you’re able to maximise your entitlement.

The pool of working capital is the most important asset that your business has. Ensure you have a strategy for accessing additional capital if you need it. Alternative sources of credit such as invoice finance can release the funds tied up in unpaid invoices, involving a lender who agrees to advance money against outstanding debtor balances. This can take the pressure off in a crisis and when cash flow is tight, and help cover regular expenses such as wages, utility bills and tax obligations.

Small-business owners who can understand, manage, conserve and plan their cash flow will be much better positioned to be able to ride out a time of difficulty, and emerge able to recover and resume a path to sustainable growth.

Greg Charlwood, managing director, Australian Invoice Finance

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