cash flow management Archives - The CFO Centre Australia

Improving Cash Flow Management With Innovative Strategies

Published: April 26, 2024 by lauramills

Small and medium-sized enterprises (SMEs) operate in a competitive ever-changing market where maintaining a healthy cash flow is both a priority and a challenge. As most SMEs are constantly expanding their business, cash flow management is a constant challenge to the long-term success of their business.

However, with the right strategies, businesses can significantly enhance their cash flow management, ensuring stability and paving the way for smooth funding of their future growth. This blog explores practical advice on optimizing inventory, improving payment terms, and leveraging technology to bolster cash flow.

Optimising Inventory for Better Cash Flow

Inventory management plays a crucial role in cash flow optimization. Excess inventory ties up capital that could otherwise be used for growth initiatives, while too little inventory can lead to lost sales and unhappy customers. Here are innovative strategies to optimise inventory:

Just-in-Time (JIT) Inventory: If possible, adopt the JIT approach to reduce inventory costs by receiving goods only as they are needed in the production process, thus minimising inventory levels. Drop shipping: Consider drop shipping for certain products to eliminate the need to keep them in stock, as the supplier directly ships orders to customers.
Inventory Analysis: Optimise your inventory to prioritise items that are high volume, high-margin items for better cash flow and higher profitability. Ensure seasonal inventory items are carefully ordered and sold before the end of their season. This will minimise inventory holding costs and while ensuring you have the inventory your customers require.

Enhancing Payment Terms with Customers and Suppliers

Negotiating favourable payment terms with both customers and suppliers can significantly impact your cash flow. Here’s how:

Faster Customer Payments: Encourage quicker payments by setting up automated payment reminders, or using digital payment solutions that simplify the process for customers. Ensure a dedicated staff member is responsible for managing Customer Payments and follow up. Having consistent clear communication with Customers will minimise disputes and reduce delays in receiving payments.
Extended Supplier Terms: Negotiate longer payment terms with suppliers to keep cash in your business longer. This might include 30 or 60 day terms, giving you more time to sell inventory and collect receivables before payment is due.
Electronic Invoices and Payments: Transition to electronic invoicing and payment systems to reduce the time between billing and payment collection, speeding up cash inflows.

Leveraging Technology for Enhanced Cash Flow Management

Technology offers powerful tools for improving cash flow management, providing real-time insights and automating financial processes:

Cloud-Based Accounting Software: Implement cloud-based accounting solutions that offer up-to-date financial information, helping you make informed decisions quickly.
Automated Receivables and Payables: Use software that automates invoicing and bill payments, ensuring you manage receivables and payables efficiently, improving cash flow predictability.
Cash Flow Forecasting Tools: Utilise cash flow forecasting tools that integrate with your accounting software to predict future cash flow based on historical data and current trends.

Additional Strategies for Cash Flow Enhancement

Lease, Don’t Buy: Leasing equipment rather than purchasing it can free up cash for other uses, though it’s important to weigh the long-term cost implications.
Re-evaluate Operating Expenses: Regularly review and cut unnecessary operating expenses. Even small reductions can free up significant cash over time.
Increase Sales with Marketing: Invest in targeted marketing efforts to increase sales volume, focusing on high-margin products or services that contribute positively to cash flow.

Conclusion

Improving cash flow management is an ongoing process that requires attention to detail, strategic planning, and a willingness to adapt to new methods. By optimizing inventory management, enhancing payment terms, and leveraging technology, SMEs can create a robust framework for managing cash flow effectively. Implementing these strategies can not only stabilise cash flow but also fund your businesses ongoing growth and ensuring success in the competitive business environment.

Planning, forecasting and optimising cash flow is the lifeline of any thriving business. At The CFO Centre, our strategies and seasoned CFOs help SMEs improve their cash flow management, ensuring a healthier, more sustainable financial future. Whether it’s preparing a multi-year 3-way forecast (Cash Flow, Income Statement and Balance Sheet) for your Bank, refining payment terms, inventory management, or leveraging technology, we’re ready to assist. Connect with us to explore how our tailored cash flow solutions can benefit your business.

4 Top Tips for Cash Flow Management

Published: March 17, 2023 by lauramills

Cash Flow Management is pivotal in any business. All too many business owners think that the battle is won once the marketing rolls out and the product is sold. They see that their investment of time and resources has paid off and therefore, assume that their goal has been achieved.

However, the fruit of these hard-won victories can quickly run out. Your working capital (debtors, creditors and inventory) should be carefully maintained with a structured cash-flow management plan.

Here are some key points for businesses to keep in mind when managing cash flow:

Analyse cash flow history and identify patterns

This is particularly useful for businesses that have been in operation three years or more. The past can prove a helpful guide for predicting future ups and downs. Therefore, you can more consistently capitalise on the ‘ups’ while preparing for the ‘downs.’

Review your cash flow management systems and processes

Who have you invoiced? Who has paid? And have you made your payments? Without reliable systems and processes in place, you simply cannot accurately ascertain what your monthly cash flow is, let alone manage it.

Ensure your customers pay before suppliers are paid

With each new business relationship, decide with your debtors a credit plan that will ensure you get paid on time. If a particular arrangement is not working, try something different, such as a payment plan. A partial payment now is better than no payment at all. Make it easy and convenient for the customer, by having all the necessary information on the invoice, and offer various payment options.

As for creditors, try to get as extended an arrangement as possible. As a result, this can help ensure that you’ve been paid by your debtors first. You will reduce the risk of default and help ensure you make payments on time.

Be transparent with your bank

Your bank is your most important creditor. It can also be your best ally if your cash flow projections and business plan inspire confidence. Communicating with your bank about your payment status will also engender greater confidence and lessen the negative impact should a surprise late payment or default arise.

The above key points are all necessary elements in managing your cash-flow well, but they are not sufficient in and of themselves. They is no replacement for tailored advice from an experienced professional. The CFOs at the CFO Centre are all highly experienced in cash-flow management and are dedicated to helping ambitious businesses meet their strategic objectives. For more information, contact the CFO Centre on 1300 447 740.

Photo by Riccardo Annandale on Unsplash

4 Signs That My Business Might Need CFO Services

Published: June 28, 2022 by lauramills

I have recently been talking to business owners and executives who want to build more resilience into their business. They are considering adding a part-time Chief Financial Officer (CFO) to their team. During these discussions, two questions usually come up. “How do I know if my business needs a CFO?” and “what does a CFO do that my Accountant can’t?”. I would like to share some thoughts on these questions.

The primary responsibility of a CFO is to optimize the financial performance of a company. This includes its reporting and accountability, liquidity, return on investment and long-term value creation.

A CFO has a forward-looking perspective. They look at interactions of the business with outsiders, acting as a diplomat and negotiator with third parties. Often the strategies put in place by a CFO are not short-term fixes. Some may take months or years to be fully realised.

How do I know when my business needs a CFO?

As to the question of when a business needs a CFO, the following indicators may be helpful.

Internal – When information that helps in making important decisions is not timely or reliable.
External – When improved respect must be gained outside the business. eg from investors, customers, suppliers, labour markets, regulators etc.
Rapid Growth – Growth requires an expansion of systems, and usually additional capital to finance the growth.
Exit – When a business is preparing for a merger, acquisition, or business sale.

So, when the business is at the stage of increased external engagement and growth, a CFO can add significant value.

What does a CFO do that my Accountant can’t?

A CFO always works closely with the external Accountant. Having an accounting background, the CFO is well placed to understand the role of the external Accountant. The external Accountant’s role is mostly concerned with compliance and transactional advice. They work from their own offices and will normally attend the client’s business premises periodically. External Accountants often have the skill sets to provide additional services. However, they are usually not involved closely enough in the running of the business to make this a sensible use of their time.

Functions such as the below will either fall to the CFO or some other suitably qualified resource will need to be allocated:

Budgeting and forecasting
Cash flow management
Financial reporting
Scenario planning
Internal controls
Insurance
Bench-marking and key performance indicators
Incentive schemes
Management of key suppliers
Accounting policies

If the business doesn’t have a CFO, the CEO or one of the Directors have to take ownership of these functions. This means they are taken away from other important leadership and governance roles. They also may not have the depth of experience in the technicalities of financial transactions to handle these things well.

Some of the common misconceptions about a CFO

There are some common misconceptions about a CFO that are worth discussing.

The first misconception is that a CFO may have an excessive focus on short-term financial results ie this year’s profit. Financial success of the business is undoubtedly the objective of any CFO. This, however, does not mean sacrificing long-term value creation for short-term results. A CFO is interested in the success of all business stakeholders. This includes owners, employees, customers, suppliers, financiers etc. All stakeholders must be rewarded to ensure the long-term health of the business.

CFOs are therefore, likely to be just as interested in the business strategy as they are in the profit and loss statement. In addition, culture, reputation, governance, and risk management will be on their radar. A good CFO recognises that sustainable financial success is only achieved when all aspects of a business are working well.

Another commonly held misconception is that CFOs think in “black and white”. That therefore, they may not be comfortable with the various shades of grey that business and life deal up. Whilst that may be true for some aspects of a CFO’s decision-making, good CFOs will look closely at the underlying issue. For example, CFOs are often involved in analysing the performance of a business or even individuals. In understanding performance, a CFO will often consider a range of underlying factors. This can include; roles and responsibilities, resources, delegated authorities, remuneration and incentive systems, behavioural assessments, management approach, and organisational structure and culture. CFOs are first and foremost experienced corporate managers. They understand that people are usually the most critical resource in businesses. From experience, most CFOs are skilled at dealing with people issues sensitively.

If you’d like a confidential discussion about whether a part-time CFO could be right for your business, please contact us.

Allan Robb, CFO at the CFO Centre