Company directors have a duty to act honestly and in the best interest of the business. One of the most important parts of this duty is maintaining an understanding of the company’s financial position.
Directors are responsible for dozens of tasks. It’s easy to let your financial duties slip through the cracks, but this can quickly lead to financial distress – particularly in small businesses.
In the worst case, ignoring this duty can lead to the failure of a company and personal liability for its directors.
The simplest way to avoid this outcome is to manage your company’s cash flow. In this article, we’ll provide our top tips for small business cash flow management and how you can stay on top of your financial situation.
Our Top Tips for Small Business Cash Flow Management
1. Create a Cash Flow Forecast
Forecasting is the first step in managing your small business’ cash flow. It’s common for companies to forecast cash flow on a monthly, quarterly or yearly basis.
Most forecasts are created using historical data to estimate cash inflows and outflows.
If you’re a new business with no historical information, you can forecast cash outflows to determine how much income the business needs to be profitable. Working backwards, you can then estimate cash inflows and determine whether your forecast is feasible.
Using forecasts makes it easy to track fluctuations in your financial position. For example, if you know that a large debt payment is due in a particular month, you can ensure you have cash on hand and avoid insolvency.
While there’s no legal requirement to maintain cash flow projections, it’s the best way to estimate your position at a particular point in time. This is part of your directorial duty to act in the best interests of the company.
The Victorian Government offers a simple guide on cash flow forecasting for small businesses.
2. Automate Accounts Receivable
Being slow to invoice is a common mistake for small businesses. While generating and monitoring your invoices can be a large task, it’s a crucial part of keeping your business moving.
The simplest way to manage this process is to use invoicing software that can automate the process. Depending on the software you choose, you’ll be able to generate, submit and track invoices in just a few minutes’ work.
It’s also a good idea to implement accounts receivable policies, particularly if you are extending credit to your customers (e.g. providing goods in advance of payment). These policies help with enforcing payment terms and preventing late payments, which can significantly reduce your cash flow at critical times.
3. Manage Your Tax Obligations
Companies operating in Australia have tax obligations to the Australian Taxation Office (ATO) and the relevant State Authority.
Your ATO tax obligations include:
- Holding an ABN, ACN and TFN (where applicable)
- Registering for GST if your annual turnover is $75,000 or more
- Registering for PAYG withholding if you pay employees or contractors
- Paying the superannuation guarantee for eligible workers
- Lodging Business Activity Statements (BAS)
- Lodging an annual tax return
- Paying tax at the applicable company tax rate
It’s important to know that company directors can be held personally liable for unpaid tax debts relating to GST, superannuation and PAYG withholding. It’s crucial that these amounts are paid on time.
4. Build Relationships With Suppliers
As you grow and build relationships with suppliers and creditors, you’ll have more freedom to negotiate rates that suit your cash flow needs.
For example, growing companies can often take advantage of bulk discounts with product and materials suppliers. These may not be available to your company when it’s new, but you can always revise your agreements to cut costs and streamline your operation.
This also applies to creditors. Your access to credit – and the terms of your credit agreements – should change as the business evolves. You should regularly review your options and talk to creditors about your arrangements.
5. Budget Your Expenses
Excessive spending is a common pitfall for small businesses.
If you need to spend money, consider the purchase from a business perspective. Will it contribute positively towards the business? Will it generate income, reduce costs or improve efficiency?
If the expense is a net positive for the business, it’s worth considering. Just make sure you have enough cash on hand to cover your normal expenses, as well as unforeseen circumstances.
6. Build Up Your Cash Reserve
It’s common for businesses to maintain a cash reserve equal to 3-6 months of operating expenses. While this isn’t realistic for all small businesses, it does give you breathing room if something goes wrong or if you need to take advantage of a new opportunity.
Much like personal savings, business cash reserves can be built over time if you don’t have the money up front. Include savings in your cash flow projections and make regular contributions to a business savings account.
7. Keep Detailed Records
All business activity should be monitored as part of your financial records. Keeping detailed records not only helps track cash flow, it allows you to monitor your position, forecast the future, and meet your directorial and taxation obligations.
Income tax and company financial records should be kept on file for a minimum of 5 years. You may need to refer back to these records when dealing with your accountant, adviser or the ATO.
8. Seek Professional Advice
Don’t be afraid to seek professional advice!
Running a small business requires you to build dozens of new skills. But help is always available if you’re unsure how to manage cash flow, project revenue or handle your tax obligations.
The best thing you can do as a business owner is to build relationships with a professional adviser. Advisers are experts in business operations and solvency, and they can provide guidance on how to continually grow and improve your company.
This is particularly important if you find yourself struggling with company finances. The earlier you seek advice, the better. Make sure you monitor financial performance and discuss your situation with a professional if you have any questions.
Talk to Business Savers if You’re Concerned About Your Business’ Cash Flow
Australia is a nation of small businesses. There are tens of thousands of small companies across the country, so you aren’t alone if you’re struggling with company cash flow.
The team at Business Savers are experienced advisers. We provide professional advice and support companies that are struggling with solvency.
Talk to Business Savers if you are concerned about your financial situation. Acting quickly gives your business the best chance of surviving. You can book a confidential consultation online, or call us for more information.
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