928

Practical cash flow strategies for SMEs

By Saeed Mirzakhani | Partner

For any business owner, the perpetual flow of money is an aspect of business that requires constant monitoring. Without strong cash flow management, owners will lose out on important growth or expansion opportunities, lack sufficient funding for new projects, or even struggle to keep up with operating expenses or payroll.

As we’ve discussed previously, if you’re not tracking and prepared for these expenses, the business could face cash flow shortages at the most critical time. Here are six ways to practically stay on top of your cash flow:

1. Negotiate favourable payment terms with your suppliers

Regular engagement and communication with your key suppliers is critical to better creditor management and, therefore, cash flow. If you work with a few larger suppliers, try requesting extended payment terms of 60 or 90 days. Usually suppliers that have robust relationships with their customers are comfortable providing more lenient trading terms. This slows down your creditor days (the average time it takes to pay your suppliers), therefore resulting in improved cash outcomes for the business.

2. Request upfront and milestone payments from clients

If you’re providing professional services on a retainer, or working on a fixed-scope project, it’s worthwhile requesting a certain percentage of payment upfront before any work commences. Whilst this establishes credibility for the customer, it also provides financial security, particularly in the case of new clients, where there’s no trading history. Additionally, you can stipulate milestone payments in your contract / scope of work to trigger payments at certain points in the project. This is particularly helpful if a project spans over numerous months.

3. Compartmentalise larger expenses

It’s a useful practise to compartmentalise larger and more cumbersome expenses such as tax obligations or employee superannuation. Traditionally, superannuation is something that is paid quarterly, however, if paid monthly, your company’s cash flow burden reduces accordingly. Other examples might include tax obligations — smart business owners save for their annual compliance obligations (IAS, BAS, payroll tax and income tax) on a consistent periodic basis.

4. Utilise debt funding, carefully

Your business will generally experience financial ebbs and flows throughout the year. For example, seasonal or holiday periods may impact trading conditions. Debt funding via an overdraft, invoice factoring, or a conventional loan can help your business “trade through” such volatile times. When used pragmatically, calling on lenders can be a strong complement to your business’ operation, rather than the owners needing to contribute more shareholder equity or loans to the business. It is critical that debt funding does not create undue pressure on the business with onerous repayment terms or overextending, hindering the business’ ability to service the loans.

5. Lease, don’t buy

Leasing fixed assets such as furniture, computer equipment, machinery or vehicles, and paying for the asset over fixed monthly payments is often a superior cash flow solution than buying the asset outright. While there may be lease fees and interest payable on such arrangements, they’re generally tax deductible, therefore after tax costs are further reduced. If you currently own numerous business assets outright, consider a “sale and lease back” arrangement to release the equity in your fixed assets.

6. Get ahead of the tax game

Although often overlooked, strong tax planning can be one of the most effective cash flow management tools. It’s critical to engage your tax advisor well before 30 June (ideally around April or May) so there’s sufficient time to action any strategies before the end of the financial year. An experienced tax adviser will help you manage prepayment of eligible operating expenses or interest on loans, help devise director fees, and outline any additional remuneration to related or unrelated parties.

We can help manage trust structures, superannuation contributions, and related party transactions. Additionally, any new pronouncements or budgetary changes should be employed in the tax planning process.

Engage a trusted adviser

At its heart, CharterNet is an adviser — a trusted resource whom business leaders can rely on for information and direction during their most critical business and financial decisions. Having worked closely with business owners over the last seven years, we have a vast range of experience. We’re experts in cash flow management, taxation and business advisory and our team are always on hand to guide you and your business throughout its life cycle. To start the conversation, contact us here.