How to keep cash flow strong in a slow market? When markets slow, one of the first things to suffer is often a business’ available cash flow.
RECIPE FOR SUCCESS INGREDIENT CARD
Ingredient: Cook the Books
Question:
How to keep cash flow strong in a slow market?
Answer:
When markets slow, one of the first things to suffer is often a business’ available cash flow, as evidenced by recent reports that three in four Australian small businesses will hit a cash flow ‘crisis’ by July 2023. Oracle NetSuite’s Jason Toshack shares five smart tactics to help businesses maintain a healthy cash position during quiet periods.
In January, Australia’s household spending fell by 18.3 percent compared to the previous month, a sign of consumers tightening spending following the December festive season splurge. Reflecting the reality of today’s economy, the fall in January highlights the impact that seasonal cycles can have on a business’s cash flow.
A strategy for handling cash flow shortages
There are a number of tools and tactics available to help prepare for slow markets. A robust business management system can help provide insights to identify the best performing, highest revenue-generating products and services, allowing a better handle on cash flow. With this data at hand, businesses can focus on ramping these areas up while simultaneously winding back the areas that show lower returns or lead to greater costs.
Here are some top tactics to help business leaders maintain a healthy cash position during quiet periods:
1. Analyse the cash flow
Cash flow is the lifeblood of a business. Not to be mistaken for profit, this is the money that flows in and out to keep the business running on a day-to-day basis. It is important to monitor it closely at all times. One way to do this is by conducting a cash flow analysis, which helps a business stay healthy by identifying where money is coming from and where it is being spent.
When doing analysis, line items are correlated in one of three areas: operating, investment and financing.
By examining these three areas, conclusions can be drawn about the general state of the business. Most importantly, this process highlights areas of drain and profit that need to be adjusted to keep cash flow across the business healthy.
2. Make forecasts
Combined with historical financial data, analysing cash flow helps create more accurate forecasting. Forecasting enables a business to maintain its cash position throughout the year. Closely linked to the monthly budget cycle, forecasts help business leaders identify upcoming cash shortfalls and surpluses, enabling them to plan for cyclical market conditions.
Using financial data, businesses can more accurately forecast cash flow and determine how much money is needed to sustain themselves during slow periods.
Forecasts can also help businesses see the long-term impacts of potential investments and better balance debt management, by aligning repayment levels with anticipated income. This way, businesses have a better chance of balancing books at the end of each month.
3. Assess working capital
Working capital is the money businesses have available to meet short-term financial obligations. The working capital ratio is calculated as current assets divided by current liabilities. So, a working capital ratio of less than one means the business is not generating sufficient cash to pay down debts or cover expenses within a certain time frame.
By effectively managing working capital, businesses can optimise spending to meet day-to-day expenses, while still being able to invest appropriately in goods, services or projects to generate an income.
There are a number of ways to increase working capital to help maintain cash flow if the business is slow, including:
•Refinancing short-term debt
•Analysing and reducing expenses
•Selling liquid assets
•Taking on long-term debt
•Additionally, businesses can look at high-interest savings accounts
4. Make financial processes more flexible
If cash flow is tight, businesses can delay vendor payments, while also shortening the invoicing cycle to bring cash in faster while managing outgoings. Businesses can also introduce incentives such as offering discounts for ‘on time’ payments or implementing penalties for late payments.
Invoice automation can also help. Manual invoicing processes, which might historically have taken days or weeks to complete due to resource constraints, can be done almost immediately. This automation can speed up the time it takes between selling a product or service and being paid. It also cuts down on the staffing resources needed to carry out repetitive manual invoicing tasks.
5. Create new opportunities
With real-time financial data, it’s possible for businesses to create opportunities for additional cash flow through up-selling and cross-selling. Times of tight cash flow is also a good time to revisit business models and make tweaks to better respond to external market pressures.
Using data, business leaders can collect information about customer sales history and cross-reference it with inventory in such a way that alternative or complementary products or services can be offered. This approach can produce more income, regardless of market conditions.
By making the most of a cyclical spending surge, businesses with processes and systems aimed at maintaining cash flow during sluggish periods have a better chance of staying healthy throughout the year, regardless of rollercoaster sales cycles.
Business leaders need to have a strategy in place to maintain cash flow in a flat market. An evaluation of the business model across expenses, operations and processes is a good start to stem cash flow shortages during slow periods.
While implementing the steps above will increase the cash flow, it is also important to make the appropriate decisions across customer service, marketing, product and sales.
(Source: Koshies Business Builders – October 3, 2022 (Jason Toshack is General Manager ANZ Oracle NetSuite).
Want to learn more about why ‘money matters’?
Download a copy of
ONLY $19.95
https://349200.e-junkie.com/product/1615593/How-to-Cook-the-Books-eGuide
eGuide:
For a low investment, download a copy of How to Cook the Books eGuide. This eGuide is easy to read with lots of examples, case studies, tips, and activities…knowhow you can use it in your own business immediately.
This eGuide is delivered online, so you can access it from your computer at a time convenient to you.
