The ability to manage cash flow effectively is crucial for any business, but it is particularly important for small businesses that are just starting. 

Managing finances is an important aspect of running a successful business. However, with recent inflation and economic uncertainty, managing finances has become even more challenging.

Small businesses need to have a good understanding of their cash flow and be able to manage it effectively to ensure their survival and growth. 

“I always encourage people just starting businesses to assess it’s going to take two to three years to have positive cash flow,” My Business Entrepreneurship Facilitator Chris Mooney said.

“Don’t think you can start a business without savings or money. The less you have to borrow, the better.”

“Businesses had been through a long period of time where capital was almost free relative to what you could get for it, but that’s changing very quickly with recent economic uncertainty and recent inflationary concerns.”

“Clearly, the emphasis now is on managing or conserving cash and borrowing less for most small businesses.”

Creating a healthy cash flow

Cash flow is the lifeblood of any business. Therefore, regularly monitoring cash flow is crucial in managing finances. By monitoring cash flow, businesses can identify any discrepancies between their projected cash inflows and outflows and take action to correct them, according to Mr Mooney.

To monitor cash flow, businesses should compare their actual cash inflows and outflows against their budget projections. This will help them to identify any potential cash flow problems and take corrective action, such as reducing expenses or increasing revenue.

One of the most important things that small businesses can do to manage their cash flow is to create a cash flow forecast. A cash flow forecast is a projection of the inflows and outflows of cash for a given period, usually monthly or quarterly. By creating a cash flow forecast, small businesses can better anticipate their cash needs and identify potential cash flow problems before they occur.

To create a cash flow forecast, start by listing all of your expected income and expenses for the period. This can include sales revenue, rent, utilities, salaries, and any other expenses that you expect to incur. Next, estimate the timing of this income and expenses, and use this information to create a monthly or quarterly projection of your cash inflows and outflows. This will give you a clear picture of your cash position and help you identify any potential shortfalls.

“In terms of managing cash flow, I don’t often meet people in small business who are forecasting their future cash flows enough,” Mr Mooney said.

“Forecasting cash flow is about taking into account all the nuances like tax, superannuation and GST and making sure, more importantly, that if I employ people, I’ve got money in the bank to pay employees in the following period.”

“If you’re not forecasting cash flow, you’re just running a lottery on your business, and if people don’t get paid, they won’t stay.”

Building stability

When it comes to financing the business, debt can be a useful tool for businesses to finance their operations. However, managing debt effectively is critical to managing finances, Mr Mooney noted. Businesses should ensure that they are not taking on too much debt and that they have a plan to repay their debt.

To manage debt effectively, businesses should review their debt obligations regularly and identify any opportunities to refinance or consolidate their debt. They should also prioritise debt repayment to reduce their interest expenses.

“If you’ve got a partner, make sure that your expectations or financing and managing cash flow drawing salaries are aligned and you are not over-committing,” Mr Mooney said.

“It’s about carefully forecasting your future business growth. There are tendencies when the business is likely to be a success and the owners over-commit to borrowings.”

Inflation and economic uncertainty are also causing prices to rise, which can put pressure on businesses’ expenses. Therefore, keeping a close eye on expenses is essential to managing finances. Businesses should review their expenses regularly and look for ways to cut costs without compromising the quality of their products or services.

“At the moment, long supply chains are hurting small businesses,” Mr Mooney said.

“Small businesses might have had to pay a deposit for some equipment or supplies months ago, and the product still hasn’t arrived. With extended supply chain problems, it is super important that businesses are realistic about the impact that’s having on their cash flow and their ability to repay loans.”