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Managing cash flow is crucial for small business owners. Even a profitable business can experience challenges with poor cash flow management. In this guide, we’ll share practical tips to help you avoid a cash flow crisis and ensure your business remains financially healthy.

Understanding cash flow

Cash flow refers to the money moving in and out of your business. Cash IN come from sales, interest earned, and investments. Cash OUT covers expenses like rent, payroll, bills, and supplier payments. Positive cash flow means your inflows exceed outflows, while negative cash flow indicates more money going out than coming in.

Why cash flow matters

You might ask, “Why is cash flow so important if my business is profitable?” The answer is simple: without sufficient cash on hand, you can’t pay your bills, invest in growth, or meet your financial obligations as they fall due. Understanding and managing your cash flow is essential to maintaining the health, stability and success of your business.  Not to mention it can become stressful for business owners who feel like they are constantly chasing their tail with a constant shortfall of cash.

📌 Manage your expenses

Regularly review your expenses and look for ways to create efficiencies. Can you negotiate better terms with suppliers? Are there subscriptions or services you no longer need? Are your direct costs inline with industry benchmarks and running at the ideal ratio to sales, are there any productivity gains possible? By keeping a close eye on your expenses, both above the line and below the line you can identify savings opportunities and reduce your outflows.

📌 Encourage repeat business

It’s often cheaper and more effective to retain existing customers than to acquire new ones. Offer loyalty programs, discounts, or incentives to encourage repeat business.  Are there any additional products or services you could offer existing customers? Happy customers are more likely to return and recommend your business to others.

📌 Invoice quickly and set shorter payment terms

The sooner you invoice, the sooner you’ll get paid.  Implement a system to send invoices immediately after delivering goods or services.  Consider setting shorter payment terms (e.g., +14 days after invoice date rather than +30 days or 30 days after invoice date rather than +30 after end of the month) to improve cash flow.

📌 Don’t accept late payments

Late payments can severely impact your cash flow. Consider offering discounts for early payments or imposing penalties for late payments. Where possible, have customers prepay for goods, or pay a deposit on works to be completed.  For larger sales, look at progress payments.  Clear communication about payment terms and consistent follow-ups can help ensure timely payments.

📌 Manage your inventory

Too much inventory ties up cash unnecessarily. Implement just-in-time inventory practices to order items only when needed. Regularly review your inventory levels and turnover rates to ensure you’re not overstocking slow-moving items.  In some business’ inventory can be sent directly from the manufacturer to the customer, completely removing the need to hold inventory.

📌 Cash flow forecasting

A cash flow forecast is a projection of your cash inflows and outflows over a specific period, usually 12 months. It helps you anticipate potential shortfalls and take corrective actions in advance. We have a template that we can provide if this is something that you would like to do in 2025 and  it should be updated monthly with actuals so that you can constantly review your situation.

📌 Build cash reserves

Having a cash reserve can help you weather unexpected expenses or downturns. Aim to save enough to cover at least three months of operating expenses. This financial cushion can provide peace of mind and stability during uncertain times or seasonal sales changes that you may experience.  This is beneficial over the December/January period where costs are higher due to forced business shut-downs and slightly longer debtor payment time frames which often don’t return to normal until late January/early February.

📌 Improve operational efficiencies

Look for ways to streamline your operations and reduce waste. Can you automate certain tasks? Are there more efficient methods or technologies you can adopt? Improved efficiencies can lead to cost savings, higher sales and therefore improved cash flow.

📌 Explore multiple revenue streams

Diversifying your revenue streams can help level out your cash flow. If one source of income dries up, having others can keep your business afloat. Consider adding complementary products or services, or exploring new markets.  It may be possible to collaborate with other businesses to create these additional income streams.

📌 Obligations

Do you have loans that your business cannot really afford which is taking valuable cash out of your business without adding value to it? Review all your assets and loans and sell out/pay off the ones that are not serving your business. If you cannot pay your employees superannuation or other ATO obligations as they fall due, this is a clear sign that cash flow is an issue.

📌 Negotiate with suppliers

Can your suppliers offer better payment terms or discounts for bulk purchases?  If not why not?  Building strong relationships with your suppliers can lead to better terms that assist to improve your cash flow. Don’t hesitate to negotiate and ask for what you need.

Final Thoughts

Effective cash flow management is critical for the success of your small business and is set to become increasingly important. As we approach July 2026 when ‘Pay Day Super’ comes into effect, this will become an increasing problem. Now is the time to really start working on your cashflow.

By following these practical tips, you can avoid a cash flow crisis and ensure your business remains financially healthy. Remember, a little proactive planning can go a long way in securing your business’s future.

We can help you with a cash flow forecast, and if you need advice or further assistance, feel free to reach out to our team.

Email admin@thebooksitters.com.au

Phone (02) 4861 4572

We’re here to help.