Unfortunately, there is no magic button to press to ensure a steady income for your business. But by better managing your finances and preparing for cash flow shortfalls, you can help safeguard your business through tough times.
Here are 7 tips to help manage a fluctuating income.
1. Tackling poor cash flow
Hitting a cash flow shortage is one of the biggest concerns for Australian business owners and it’s a legitimate fear, considering key cash flow statistics. One of the simplest ways to combat poor cash flow is to make vendors pay on time. But just asking them to do so is unlikely to bring about the desired result. Offering incentives for early payers is more conducive. Consider a 2 per cent incentive discount for vendors that pay within 10 days. The discount is unlikely to have any serious impact on your business, but the promptly received funds may well make a significant difference in low periods. It can also save you interest on any outstanding business loans if the money is used to pay them back faster.
2. Late payments
Invoicing on time and ensuring your invoices have clearly defined payment dates will also encourage more prompt payment. Invoices should be completed as soon as possible; daily is advisable so that there is no delay in their processing. A Late Payments Study commissioned by PayPal found that only 12 per cent of Australian businesses request upfront payment, with 67 per cent taking up to a week to send an invoice.
3. Invoicing solutions
Offering suppliers an online payment option can speed up time between invoicing and payment simply by making payment less tedious for vendors. Online invoicing solutions such as cloud accounting software programs, are ideal for time poor clients.
4. Sufficient business planning
Ensure your business planning is sound right from the get go by setting aside 20 per cent of your total starting capital to budget for unexpected expenses. This should cover roughly three months’ operating expenses. Set clearly defined rules about what it should be used for so you don’t dip into it unnecessarily. Sound financial planning involves not only creating a business expenses budget but also monthly reviews of your business plan to factor in fluctuations in revenues and revise income forecasts.
5. Being strategic with money
When cash flow is good, put money aside for a rainy day. Reserve 15 to 20 per cent of your monthly income to cover unforeseen variable costs such as price hikes in raw materials, packaging and labour.
6. Short-term investments
Investing surplus cash in short-term investments that can be easily recouped in emergencies is one good way to make the money work for you in the meantime.
7. Alternative avenues
If seasonal fluctuations are to blame for your cash flow shortfall, consider how you could tap alternative revenue streams by diversifying your products or services catalogue, or securing new markets such as those overseas or online.