On the front foot: 3 cash flow resolutions to make this year
It might not seem as sexy as marketing or feel as rewarding as hitting sales targets, but make no mistake, implementing smooth cash flow processes is one of the most important parts of running your small business.
In fact, inadequate cash flow or high cash use is the number one reason for business failure in Australia, responsible for almost half of all shuttered businesses, according to the Australian Securities and Investments Commission (ASIC).
We’ve asked an accountant, an award-winning small business and a business coach to provide three straightforward, actionable steps you can implement in your own business when it comes to operating cash flow in 2020.
In a nutshell, their tips are:
- Tip 1: Set aside a percentage of your sales into a separate bank account for tax on an ongoing basis.
- Tip 2: Review all your outgoings for services or subscriptions you no longer need.
- Tip 3: Adopt the mindset: sales – profit = expenses (not sales – expenses = profit).
Mili Fernando, Chartered Accountant and Founder of Next Chapter Accounting
Don’t wait until your tax and compliance payments are due to set aside the cash, advises Fernando.
“Be proactive with setting aside money and don’t let tax and compliance payments come as a surprise,” she says.
“Understand your numbers so you know what is coming and when it will be due.” If you need help in this area, download Prospa’s cash flow forecast template.
Most small businesses will need to make compliance payments of GST, PAYG withholding and superannuation on a quarterly basis, Fernando says.
Here is her 4-step plan for meeting your obligations:
- Set up an additional bank account for your business compliance.
- On a regular basis (perhaps weekly) transfer 10% of all sales into this account to cover GST.
- Every time you process payroll, transfer across the super and PAYG withheld.
- Use the funds to make your compliance payments.
Setting aside cash for income tax payments can be a bit more complex depending on the business structure you have (sole trader, company, trust or partnership), and if you’re already making PAYG tax instalments, Fernando says.
“So speak to your accountant or, based on your numbers, ensure that on a regular basis you’re setting aside cash to make that lump sum income tax payment at the end of the year,” she says.
Jane Simpson, Owner of small business Jane Simpson Brows
Do you still need to be paying $40 per month for that graphics editing software you don’t use anymore? Or perhaps a cheaper rival has since disrupted the market. Simpson recommends business owners take some time out in the new year to review all their outgoings.
“But when things are going well in small business we tend to sign up to subscriptions or services that were a good idea at the time but then we don’t or rarely use them.”
Simpson says as these subscriptions or services simply come out of the account they can be forgotten about or ignored.
“But all of those costs can really add up, so you need to make the time to sit down and cancel or review them,” Simpson says.
“By auditing your expenses and really considering outgoings, this will free up cash and help smooth out any future cash flow issues.”
Stewart Bell, Business Coach and Founder of Audere Consulting & Coaching
Running out of money when everything seems to be going well is sadly a very easy and very stressful trap to fall into, says Bell.
He uses Mike Michalowicz’s Profit First system to help clients avoid this.
“The simple idea behind it is not to think sales – expenses = profit,” Bell says.
“Instead it should be sales – profit = expenses. In essence, you start managing expenses as a percentage of your revenue, instead of allowing it to dictate what your revenue needs to be.”
To put this theory into practice, Bell shares how he splits his business revenue into four accounts according to proportions that are right for a business like his:
- 40% into a dedicated operating expenses account.
- 15% in a separate tax account.
- 20% to pay yourself.
- The rest “parked” as profit.
The benefit of this approach, Bell says, is that it changes the way you make financial decisions.
“It’s an absolute game-changer that can turn end-of-year ‘paper profit’ into actual dollars in the hand,” Bell says.
“Otherwise, when you log in to check your business account balance and see a big number, it can invite spending decisions that may not be entirely helpful.”
Good habits can go a long way to fixing cash flow issues, and a line of credit can also help manage cash flow fluctuations. Find out why Prospa is Australia’s #1 online lender to small business.
The Federal Government has unveiled economic support measures to reduce the economic impact of coronavirus. We breakdown those aimed at small business.Keep reading
The coronavirus crisis has put the squeeze on many small businesses with unprecedented speed. Here are some ways that might help protect your cash flow.Keep reading
A significant expansion of the instant asset write-off scheme has made it more useful than ever. Here’s what you need to know.Keep reading
Subscribe to the Prospa Blog
Be inspired! Sign up to Prospa’s newsletter to receive tips, tools and small business success stories straight to your inbox.