6 ways to keep on top of your cash flow this year

On the back of a wild and disruptive 2020, many business owners – particularly in fast-growth sectors – are experiencing a COVID hangover. But now is the time to start making smart and sharp moves for the year ahead.

With the government winding back financial support, and potential headwinds to consider, cash flow should be your top consideration – particularly in a less-forgiving environment. At the same time, we’re seeing opportunities for growth and profit maximisation. So, to help you thrive in 2021 and beyond, here are six ways to better manage your cash flow.

1. Implement upfront or milestone payments for clients

A principle in business is that a dollar in hand today is more valuable than a dollar in future – this statement is especially true when managing cash flows. For projects spanning multiple months, having some sort of upfront cash and/or milestone payment(s) will allow you to better secure those project inputs as and when required – without having to leverage off your existing pool of funds. This strategy also has the added benefit of establishing credibility for the customer, particularly in the case of new customers, where there’s no trading history.

2. Negotiate with your suppliers

It is important to maintain a healthy relationship with your crucial suppliers. A stronger relationship may allow you to extend payment terms (in some cases we have seen our clients able to extend payment terms to 60–90 days with various suppliers) while still being able to utilise your suppliers’ services in the immediate term. This keeps the cogs in your business turning while slowing down your creditor days (the average time it takes to pay your suppliers), therefore resulting in improved cash outcomes for the business.

3. Be smart about debt funding

Debt funding may take a number of forms, including a bank overdraft, invoice factoring or a conventional loan. It can be used to plug any cash-flow holes that may arise in a business instead of requiring the owners to contribute more equity or loans to the business. It’s important that such debt funding is seen as a short-term fix, with a plan to eventually ‘trade out’ of the debt-funding facility, due to the typically onerous repayment terms and interest rates.

4. Strategise your larger expenses

It’s a useful practice to compartmentalise larger and more cumbersome expenses – such as tax obligations or employee superannuation – to match the interval by which you are reviewing your cash flows. For example, if you review your cash flows monthly, you might consider putting aside a month’s worth of income tax in cash on the same basis. If done regularly, this softens the blow come tax time and ensures you still have enough cash to continue to operate when you settle the bill. This strategy can be also used for numerous other types of obligations, such as superannuation and BAS liabilities.

5. Save money and legacy equipment by renting

By leasing fixed assets such as furniture, computer equipment, machinery and/or vehicles, this alleviates the need to pay for such assets outright and instead over a number of fixed monthly payments. Despite the lease fees and interest charges imputed into those monthly payments, they are generally tax deductible, thus making lease payments relatively attractive for cash-flow purposes. If you currently own numerous business assets outright, consider a ‘sale and lease back’ arrangement to release the equity in your fixed assets.

6. Be tax-ready for EOFY

A strong tax plan can be a very effective cash flow management tool. It’s critical to engage your tax adviser 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 remuneration to related or unrelated parties and will identify new tax measures and rule changes that may ease the financial stress of the business.

Top tips for smarter cash flow

• Tech and tools: Now more than ever, businesses are beginning to employ apps/add-ons to their accounting software to complement their financial activities. There are useful cash-flow management apps which, if set up correctly, can be of great use to businesses and their cash flow. We love Float for its ability to factor the different payment behaviours of your clients into a summarised, forward-looking cash-flow statement. We also like You Need A Budget for its ability to set up simple cash-flow targets that businesses can adhere to. Having such apps that can provide meaningful summaries almost in real-time give businesses the ability to have better oversight over their business’s cash flows and in quicker time, thus giving businesses better control over their cash flows.
• R&D funding: For businesses taking advantage of the Australia Research and Development Tax Incentive, it comes through in one big hit at the end of the tax year. Some of these businesses may, however, not be aware that there are various financiers who will provide funds in advance of that business’s R&D grant in any given year. Having a portion of the R&D grant money upfront allows businesses to finance their R&D activities without leaning on their existing pool of funds.
• Speak to your business adviser: CharterNet is, at its core, an advisory firm. We assist businesses throughout their lifecycle with critical business and financial decisions. Naturally, cash flow is a major concern during the economic uncertainties our clients are currently facing, and we have been assisting them with cash-flow scenario analyses based on their existing business activities, cash-flow projections with regard to decisions on new projects and business savings targets to help our clients get through the tougher months.

It’s true that 2020 was a challenging year for many businesses right around the country. We believe locking down your cashflows is a primary step in taking back control of your business.  Just as the market has peaks and troughs, you can take advantage of the disruption of last year and use it to thrive in 2021 and beyond. For more information and relevant business advice, contact CharterNet today or call us on (02) 8999 1199.