Effective cash flow management is crucial for any business. It ensures that a business can meet its obligations, invest in opportunities and sustain operations even in challenging times.
However, managing cash flow can be complex. Economic fluctuations, slow-paying clients and restrictive supplier terms can all affect cash flow. To navigate these challenges, businesses must adopt robust cash flow strategies.
In this article, we will explore how to optimise cash flow and why deploying smarter working capital finance solutions can help you build a resilient, growth-oriented business.
Understanding cash flow
Cash flow measures the money moving in and out of a business over a specific period. It’s different from profit, which measures the financial gain after subtracting expenses from revenue.
“A business could make a profit on an individual transaction, but it has to have cash flow to ensure that it can restock or continue to offer its services,” says Sam Ralton, Octet’s Director of Working Capital Solutions, VIC, TAS, SA.
“A lot of fast-growing companies might have good profits because they’re increasing their workload and requirement for stock and staff, but this puts pressure on their cash flow because paying core items such as invoices and wages absorbs cash.”
Macroeconomic pressures such as rising interest rates and high inflation also put pressure on cash flow. In a survey earlier this year of more than 4,500 small businesses worldwide, Xero found that 87% of small businesses in Australia experienced cash flow issues.
Commbank also reported that the demand for business finance was increasing due to cash constraints. The bank also found unpaid invoices significantly impede business cash flow.
It’s perhaps not surprising that the figures from Creditor Watch in the first half of 2024 showed that defaults in business-to-business transactions had reached record highs.
How to manage cash flow
Budgeting and forecasting are essential to effective cash flow management, providing a clear picture of a business’s financial health and guiding strategic decisions.
Creating a cash flow projection involves estimating future income and expenses over a specific period. Start by listing all revenue and investments. Then, detail all anticipated operating expenses, salaries and loan repayments.
Subtract the total expenses from revenues to determine the net cash flow for each period. This projection is crucial, especially around the end of the financial year, as it helps businesses prepare for potential cash shortages. Accurate cash flow forecasting ensures a business can meet its financial obligations, invest wisely and grow.
Accounting software, such as Xero and MYOB AccountRight, and cash flow forecasting tools help track cash flow. These technologies offer numerous benefits, such as automating processes, reducing staff hours, minimising errors and providing real-time insights into cash flow status.
Working capital solutions for cash flow management
RBA data in April found that more access to financing is needed for businesses to grow and innovate. Younger businesses without cash reserves and established businesses with cash flow challenges both face financing issues.
Working capital finance solutions can help.
Sam explains. “Business cash flow essentially consists of payables and receivables. With financing, these become levers you can pull to improve cash flow.
“You can make your payables work better for you by extending terms from your suppliers through trade finance, for instance. Then, with receivables, you can use debtor finance to essentially reduce the time from when you raise an invoice to when you get paid.”
By streamlining cash flow management through smarter working capital finance solutions, software and technology, businesses can make more informed decisions and improve overall financial health.
How Octet can help
Octet offers working capital finance solutions to help businesses better manage cash flow.
“Our Trade Finance facility is a flexible line of credit that helps businesses navigate payment issues and transact more efficiently with domestic and international suppliers,” says Sam.
Trade finance helps improve relationships with suppliers, ensuring accelerated supply chains, which is crucial in industries such as healthcare, manufacturing and wholesale.
“Our Debtor Finance facility gives businesses fast access to cash without having to wait weeks or months for their invoices to be paid. We help you free up that cash so you have the capital to buy more stock and move on to the next job. And our facility seamlessly integrates with accounting tools such as Xero and MYOB AccountRight.”
Debtor finance, also known as invoice finance, is particularly effective for businesses that need to pay their invoices promptly but don’t always get paid on time, such as in the labour-hire industry, where outstanding invoices can often be a hurdle to growth.
Debtor finance relies on the business’ receivables rather than using personal or business assets to secure financing. “By leveraging their receivables, businesses can fund their growth by using what is often their biggest asset, without risking personal property,” says Sam.
“This self-sustaining facility ensures that if the company winds up, the debt is paid off through its receivables.”
A finance partner you can trust
Cash flow is critical to business success, but it can be hindered by external economic pressures, slow-paying debtors and tighter supplier terms. However, cash flow strategies and working capital finance solutions are effective, sustainable ways for businesses to weather financial storms or take advantage of lucrative opportunities and grow. Talk to Octet’s team of working capital specialists to discover more today.
Disclaimer: These comments are only our views and should not be construed as advice. You should act using your own information and judgment. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy, and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgment as at the date of publication and are subject to change without notice.
