When you run a business, turning a profit is often a key focus as a business gets off the ground and continues to grow. As many business owners will attest to, however, profit is important, but cash flow is critical. Without adequate cash flow in the first place, a business doesn’t have the funds to pay its expenses and reach new customers. So, while business owners need to consider the margins on its products and services, understanding the flow of money in and out of the company is something that should be mastered.
Understanding your business’s cash flow is empowering. By looking at the underlying factors that impact cash flow, you’ll get a deeper understanding of the commercial aspects you need to strengthen so your business can achieve it’s short, medium and long term goals. Although companies are beginning to understand the importance of strong cash flow, it’s still one of the main reasons that businesses fail in the first few years of operation.
How many businesses have cash flow problems?
According to the Australian Securities and Investment Commission’s 2018-19 report on corporate insolvencies, 51 per cent of businesses that failed in the reporting period failed due to inadequate cash flow. Increasing from 47 per cent in 2016-17, cash flow problems aren’t a new issue for businesses. Interestingly, the second most common nominated cause of failure for corporate entities is poor strategic management, ranging from 46 per cent of reports in 2016-17 and 2017-18 to 43 per cent of reports in 2018-19. Properly managing a business’s cash flow should be part of a business’s strategic view of its operations, and the two — cash flow and strategic management — go hand in hand.
Poor cash flow limits a business’s long term commercial viability
Many small and medium businesses have been experiencing cash flow problems for several years. Unfortunately, without the right tools and advice, many business owners will continue to feel the impacts of these issues from limited opportunities to access credit, an inability to take on new projects and limitations on the business’s long term commercial viability. Difficult economic times such as those brought to the forefront this year due to the COVID-19 pandemic also exacerbates cash flow problems.
The Federal Department of Education, Skills and Employment has been conducting ongoing research to understand how COVID-19 has impacted Australian businesses. The Impact of COVID-19 on Business report released in April revealed the most common impacts, which include:
- Lower demand for goods and services (67 per cent of respondents)
- Cash flow issues (37 per cent of respondents)
- Changing business practices (33 per cent).
As a result of these effects, just under a third of businesses expect to reduce staff in the coming months. Further, a fifth of companies (22 per cent) are unsure when they will be in a position to change staffing levels. For businesses that were already in a tenuous financial position before this year, the economic impacts of COVID-19 are impacting cash flow and other vital factors that determine if a company can weather a recession.
How can your business improve its cash flow?
In simple terms, cash flow considers money going in and out of the business. Address any issues to do with ingoing and outgoing money, and you’ll address cash flow problems. Unfortunately, these problems aren’t always easily detected. Spenda provides the tools and products that business owners and leaders need to help them better understand and improve their cash flow. Whether you’re a retail or wholesale business, tools such as SpendaCollect help businesses to improve their payment processes and get paid faster, which improves cash flow.
Invest the time now to review your cash flow
Our tools are developed to not only help business owners become more strategic with their accounting and finances, but it also makes the customer experience superior to other piecemeal solutions in the market. With SpendaCollect, for example, businesses can invite their customers to join the SpendaCollect portal. The portal allows customers to view all of their invoices and previous transactions, identify overdue payments and batch-pay their account through a range of flexible payment methods. Our return on investment calculator helps business owners understand how implementing the right systems can not only improve their cash flow but how automating debt collection can save businesses time and money.
Managing debtors and keeping your business running smoothly doesn’t need to be a headache when you have the right tools and processes in place. Contact us to learn more about how Spenda can help your business to improve its cash flow.