Cash flow: the reality behind the numbers
You can be profitable on paper and still run out of cash. This is the uncomfortable truth that catches many small business owners off guard - particularly in the first few years of trading. A business that invoices well but collects slowly, or that carries too much stock, or that pays suppliers before it gets paid by customers, can find itself in a cash crisis even when the underlying business is sound.
Cash flow problems are the leading cause of small business failure in New Zealand and Australia. These ten tips won't eliminate the challenge, but they'll give you the tools to stay on top of your position and avoid the most common traps.
1. Know your cash position at all times
You can't manage what you don't measure. The starting point for good cash flow management is knowing exactly how much cash you have right now, how much is coming in over the next 30 days, and how much is going out. If you can't answer those three questions without digging through bank statements, your bookkeeping needs attention.
Reconcile your bank account regularly - weekly at minimum. Good accounting software will show you your current cash balance, outstanding invoices (money owed to you), and outstanding bills (money you owe) in one view.
2. Invoice fast, collect faster
Every day between completing work and sending an invoice is a day added to your cash flow cycle. Invoice immediately - on the day the work is done, or the goods are delivered. Then follow up promptly when payment is due. A polite phone call or email on the due date is not pushy - it's good business practice.
Consider shortening your payment terms. Many businesses default to 30 days, but 14 days is increasingly standard for small business work. Most customers accept shorter terms without complaint.
3. Separate your GST from your operating cash
If you're GST registered, a portion of every payment you receive belongs to IRD - not to you. The most common cash flow mistake GST-registered businesses make is treating all incoming cash as available to spend, then scrambling when the GST return is due.
Set up a separate bank account for GST. Every time you receive a payment, transfer the GST component (3/23 of the GST-inclusive amount) to that account immediately. When your return is due, the money is already there.
CashManager Cloud shows your GST position in real time
On the GST plan, CashManager Cloud tracks your GST liability as you reconcile transactions. You always know exactly what you owe IRD - no surprises at filing time.
4. Manage your payables strategically
Pay your bills on time - but not before they're due. If a supplier gives you 30-day terms, use them. Paying early when you're short on cash is a common mistake. Review your payment terms with regular suppliers and negotiate longer terms where possible.
At the same time, don't damage supplier relationships by paying late. Good suppliers are worth keeping, and late payment can affect your credit terms or your place in the queue when supply is tight.
5. Forecast at least 90 days ahead
A simple cash flow forecast - a spreadsheet showing expected income and expenses week by week for the next 90 days - is one of the most powerful tools available to a small business owner. It won't be perfectly accurate, but it will show you problems before they arrive, giving you time to act.
Update your forecast weekly. As actual figures come in, adjust your projections. Over time, you'll get better at predicting your cash flow patterns - the seasonal dips, the big expense months, the times when you need a cash buffer.
6. Plan for seasonal fluctuations
Most businesses have seasonal patterns - busy periods followed by quieter ones. If you know your slow months in advance, you can plan for them: build up a cash reserve during the busy periods, reduce discretionary spending in the slow months, and avoid taking on large commitments that fall due when cash is tight.
7. Don't tie up cash in excess stock
If your business holds inventory, stock is cash that's sitting on a shelf. Excess stock ties up working capital that could be used elsewhere. Review your stock levels regularly and aim to hold only what you need to meet demand - not a comfortable buffer that's been sitting there for months.
8. Review your credit terms with customers
Not all customers are equal when it comes to payment. Some pay promptly; others are consistently late. Review your debtor list and identify your slow payers. Consider requiring deposits or upfront payment from customers with a history of late payment, or tightening their credit terms.
9. Build a cash reserve
The most resilient small businesses maintain a cash reserve - typically one to three months of operating expenses - that acts as a buffer against unexpected events. A major equipment failure, a slow month, a large unexpected bill: these are manageable with a cash reserve, and potentially catastrophic without one.
Building a reserve takes time, but start small. Even setting aside a small percentage of each payment received will add up over months.
10. Talk to your accountant before problems arrive
Many small business owners only call their accountant when there's a crisis. But your accountant can add the most value when they're involved early - helping you spot cash flow problems before they become serious, advising on tax planning, and helping you understand what your numbers are telling you.
If you're using CashManager Cloud, your accountant can log in and review your books at any time. That real-time access makes proactive advice much easier. And if you need to talk through your cash position, call us on 0800 707 111 - we're happy to help you make sense of your numbers.