Understanding your cash-flow cycle is a critical part of managing a business and making sure it
works for you. But many small business owners either do not understand its importance or are
not sure where to start.
Rob Lockhart, a financial educator at Westpac’s Davidson Institute, shared some easy-to-follow
advice on cash flow management during a TradeSquare podcast interview with Catherine van
der Meulen. You can listen to the entire podcast here.
Here is a summary of Rob’s advice for TradeSquare buyers and sellers alike..
By understanding how cash flows through a business, owners will get a better appreciation of
how they can improve and plan for their cash position – and of how much cash they actually
need to keep their business operating successfully.
“When we're talking about how things are on a timing basis, different businesses have different
types of cash flow. If you've got a business that has stock or inventory, how long does that stock
sit on the shelf before you actually sell it? Because the longer it sits on the shelf, the more cash
you need to operate your business,” explains Rob.
“For example, let's say I buy a shipment of drinks for $100. That arrives and I put it on my shelf
and it is sitting there. If tomorrow, I haven't sold that and I buy another $100 worth, I now have
$200 of drinks sitting on my shelf. So that's $200 I've had to find to support my cash flow. For
three days, I'm up to $300. So the longer my stock sits there, the more cash I need to operate
my business.
“But the great news is, if I can have the stock there for less time, that frees that cash back up
and I can do other things with it. When you start to think about how to free that up, there are lots
of different things you can do.
“Take a look at the mix of stock you have: some will be fast-moving, some slow-moving. You do
not necessarily have to get rid of the slow-moving stock – it is more about asking why do you
hold it? Are those goods making a bigger margin than the other items, which will cover you for
the extra cash? Do you need to have extra space to store it? Or, maybe you have those slow-
moving items because it brings people in to buy your fast-moving items,” he explains.
“But if you don't have a good reason for that slow-moving item, it might be an idea to stop
supplying it or to ask your customers to wait a little longer, and stock only to order. That might
mean the customer faces a bit of a delay, but it means you're not chewing up that cash.”
Service businesses may not have stock, but they can still find ways to improve and even out
their cash flow, says Rob.
“You should look at how long it takes to complete jobs, because the longer you take to complete
a job, the longer it is before you can send an invoice out and get cash in – not to mention
continue to pay your staff and your rent in the meantime. Every extra day that job takes, you're
having to pay out cash for that, so that's going to impact your cash flow.
“Businesses that sell on credit end up with debtors or accounts receivable. Basically, they're
being the banker to their customer, because they're lending their customer the money to buy the
goods and services. How fast are they paying you back? Do you have a good credit credit policy
and do you enforce it and make sure your customers know what it is so that you get your money
back when you need it?”
Another key tip is to make sure you send your invoices out when you deliver your goods or
services rather than at a set time of the month. “If you send invoices at the end of the month,
you've lost 15 days of your cash.
“Once it's due, are you following up regularly with your customers and enforcing your credit
policy with them to make sure that you get your cash in on time?”
One more area Rob sometimes sees causing cash-flow issues for businesses relates to paying
suppliers.
“Suppliers quite often give us time to pay. If you're paying early, that's tying up your cash. Don't
pay them late, but if you do need extra time to pay them, talk to your creditors, ask them for
extra time – don't just not pay them. If you don't pay them, you're going to damage your
relationship with your suppliers and you don't want to do that.”
Listen to Rob’s full-length podcast here on TradeSquare.
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