Cash flow management

Your cash flow is the money you have coming in from revenue and going out for expenses.

Even profitable businesses can fail if cash flow is not managed properly. If you don't have enough money to pay your lenders or suppliers, banks may foreclose and suppliers may end contracts.

Learn how you can avoid this by managing your cash flow, controlling your expenses and increasing your profit.

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    Improving your cash flow

    Many areas of your business can affect how much cash you have available. This can include your:

    • customer payment terms
    • supplier payment terms
    • loan payments
    • future spending decisions.

    Learn how to better manage different areas of your business to improve your cash flow.

    Holding too much stock will tie up cash and increase storage and insurance costs. Practice good stock control to keep stock at efficient levels.

    Carefully manage your debtors and creditors to ensure steady cash flow in and out of your business. You may need to:

    • follow up on overdue accounts
    • develop good credit policies to keep cash coming in
    • negotiate longer payment terms with suppliers
    • time your invoices and payments so you receive payments from customers before you have to pay suppliers.

    Learn more about managing debtors and creditors.

    Make sure you are using right banking transaction products for your business. This can help you receive payments from customers sooner. This could include:

    • a mobile EFTPOS device
    • services that allow you to take payments over the phone or online.

    To increase your income:

    • review your pricing
    • use an advertising campaign
    • improve your customer service to build loyalty
    • consider growing your business.

    Learn more about strategies to increase your revenue.

    Find ways to reduce your ongoing business expenses, such as:

    Remember to clearly communicate your policies so all staff are aware and helping you reduce expenses.

    Find more strategies to better manage your costs.

    Review when you are due to be paid by your customers and when you need to make payments for your expenses. Make sure that you have enough funds coming in by the dates your expense payments are due, so you have enough money to meet payment and loan deadlines.

    Your end of month totals may be cash flow positive, however your finances may still be unhealthy. Creditors such as banks or utility providers may charge late fees or decide to end contracts and agreements if you continually make late payments. It can also impact on your credit rating resulting in increased borrowing charges or access to growth finance.

    • Compare your cash flow to similar businesses to identify where you are overspending or underspending. Learn more about benchmarking your business.
    • Financial ratios often use cash flow to measure your business and track how you are progressing. These ratios are also used by lenders and investors to determine your business's financial condition. Accounts receivable and accounts payables are useful ratios to improve time between job completion and payment.
    • Compare your forecast amounts against your actual amounts to track performance.

    Consider monitoring your cash flow daily if you think your business might have cash flow issues.

    When you have a good understanding of your cash flow, you can use that information to measure your performance and make informed decisions.

    • Review how a decision may impact on cash flow
      When making decisions on specific objectives or purchases, consider how this could impact on your cash flow. For example, an advertising campaign will increase your expenses (and lower your cash flow), but the resulting extra sales may increase your revenue (and raise your cash flow again). You may need a strategy to cover a potential temporary cash shortage to gain the long-term benefit.
    • Use financial statements to monitor cash flow
      Your cash flow statement and forecast can help you to identify financial opportunities or risks and ensure your business is heading in the direction you want.
    • Create a cash flow projection
      To get finance from lenders, you may need a cash flow projection to prove you can make repayments. If you are considering taking on debt finance, consider how repayments will affect your future cash flow.

    Understanding your cash flow will help you make informed decisions about improving your profit and performance.

    Offering credit

    Offering credit as a payment option allows your customers to purchase products or services without paying upfront. This can be risky, so ensure you have good policies in place to minimise the risk to your cash flow.

    Offering credit can also be beneficial to your cash flow as it:

    • encourages customers to fast-track or increase spending
    • gives you a competitive advantage in your market.

    You must weigh up the potential for increased sales with the risk of reduced cash flow.

    Create a policy around credit management that clearly outlines the procedures to follow when offering credit to customers

    Risks in offering credit

    • Reduced cash flow—delayed customer payments reduce your ability to purchase from suppliers. You could access debtor finance to reduce this risk.
    • Reduced profit margin—funding credit sales reduces your profit margin and is shown on your profit and loss statement. Keep this in mind when pricing your products and services.
    • Large debts—unpaid debts can pose a business risk, especially if these debts are large, single transactions.

    Credit assessments

    A credit assessment can help protect your business when you want to offer credit to customers. The assessment involves reviewing the customer's financial history to ensure they have a good record of making timely payments.

    Before offering credit, ask your customer to complete and sign a credit application form. The terms and conditions of the application form will give you the right to conduct an assessment.

    You will need to collect specific information from your customer to conduct a credit assessment.

    For individual customers, collect:

    • a signature confirming all terms and conditions are understood and agreed to
    • identification and contact details
    • approval to conduct a credit check where necessary.

    For business customers, collect:

    • comprehensive details of all directors, partners or owners
    • at least 3 trade credit references
    • a signature of the applicant
    • a deed of indemnity and guarantee for corporate clients.

    Review the following areas to help you determine your customer's ability to pay in full and on time.

    • Financial reputation and stability
      • Buy a credit report to access details of your customer's payment history, overall credit score and trading patterns.
      • Ask for references from other businesses your customer has dealt with. This will give you insight into their payment habits (regularly on time or late) and value of purchases they have previously made.
    • Financial position and future prospects
      • Ask for a reference from the customer's bank, or for copies of their financial records. This could include audited annual accounts, a current cash flow statement or a record of forward orders and sales.
    • Sector or industry trends
      • Check overall economic conditions (for example, forecasts of difficult economic conditions ahead may raise credit risk levels).
      • Research upcoming regulatory or policy changes that affect your industry, or your customer's industry.
      • Learn about trading conditions in your customer's sector. This could include major new competitors or significant cost increases for key materials or supplies.

    Decide whether to offer credit

    Base your final decision to offer credit on the data you have collected, in particular:

    • the trade credit references
    • credit report results
    • for businesses, the length of time they have been operating and financial position
    • credit terms agreement and director's guarantees signed in full.

    Provide a prompt, written response to your customer approving or declining the credit, or requesting further information.

    The response should specify:

    • the amount of credit
    • credit terms
    • guarantors (including guarantee forms)
    • penalty and default terms
    • any other terms and conditions.

    If you decide to offer credit, your customer should be required to formally authorise and inform you about their payment policies (e.g. who from their business can use credit on their behalf).

    Managing debtors

    How you manage your debtors has an impact on your cash flow.

    Use a good filing system to keep track of customers who owe you money. This will help you follow up overdue payments and control your cash flow.

    Sample debtors and creditors analysis table

    Download our sample debtors and creditors analysis table to see the impact of debtors on your cash flow.

    Debtor finance

    If outstanding debtors are impacting your cash flow, consider using debtor finance to free up the cash.

    Debtor finance involves a financial institution purchasing your debts, taking a fee and providing you with the cash amount, then collecting the debt on your behalf.

    While this will deliver cash and buy you time to focus on other aspects of your business, it will reduce your profit margins.

    Seek professional advice

    Conditions apply to this kind of agreement. Seek legal and financial advice before making a commitment.

    Benefits of debtor finance

    Debtor finance can provide steady cash flow, with access to up to 90% of the value of outstanding invoices. This allows you to:

    • pay suppliers on time and receive quantity discounts
    • increase sales by offering extended payment terms to customers
    • boost stock levels for increased demand
    • match cash flow to business performance and growth
    • upgrade equipment and produce and sell more goods or services
    • avoid tying up personal assets, as debtor finance only relies on business assets.

    Confidential invoice discounting

    Confidential invoice discounting provides businesses with instant cash funding for most of the amount owed, without customers knowing.

    Invoice discounting involves businesses making short-term loans by using unpaid debts as security. Your business remains in control of dealing with customers and collecting payments.

    Factoring

    Factoring is similar to invoice discounting, however the unpaid debts are sold to a factoring company. Customers are made aware that the factoring company has responsibility for debt collection. Make sure you use a reputable company that will not damage your reputation

    Some debtors will pay a factoring company earlier if they believe their credit rating may be impacted.

    Seek professional advice

    Seek financial advice before entering into an agreement with a factoring company.

    Debt collection options

    When an individual or business owes you money, you can take any of the following options.

    A letter of demand acts as a final warning to your customer that they must pay an outstanding debt before you take formal legal action.  A well-crafted letter of demand can limit the need for further costly actions.

    If you plan to take legal action against the business that owes you money, you must send the letter of demand before you initiate proceedings. This letter can be used as evidence that you made every effort to settle the matter, and only used legal proceedings as a last resort.

    The formal letter of demand should include:

    • the words 'letter of demand' in the title
    • how much you are owed
    • the specifics of the products or services in question
    • the date when the monies are or were due
    • a clear notice that legal action may be taken if the debt is not settled
    • any relevant evidence including invoices, contracts or written communication about the goods or services you provided.

    You can send this letter from your business, however it can send a stronger message if sent from your solicitor or debt collection agent.

    Engaging a debt collector to contact a customer about an outstanding payment can put an end to payment delays.
    You and the debt collector must abide by laws about fair debt collection. Criminal penalties apply if you engage a debt collector who breaks these laws.

    All debt collectors in Queensland must be licensed and are bound by a code of conduct to ensure consumer safety and protection.

    Learn more about:

    You can also ask your debt collection agent to register the debt against the debtor’s credit rating on your behalf. This can result in quick action to settle the debt to avoid court proceedings.

    Consider using mediation as an alternative to having a magistrate settle minor debt claims. This can save you time and settle the matter with a suitable agreement for both parties. If a solution is not reached, the magistrate will make the final decision.

    If someone owes you $25,000 or less and will not pay, you can lodge a debt dispute through the Queensland Civil and Administrative Tribunal (QCAT).

    You may choose to commence legal action to recover money you are owed.

    File a statutory demand

    You can file a statutory demand if your debtor is a company and they owe more than $4,000. Once served, they have 21 days to settle the outstanding debt, or to dispute it in court and have it set aside. If the company doesn't act, they risk compulsory winding up.

    Seek legal and financial advice before taking action.

    Start court action

    Court proceedings should be your last resort for debt collection, and only if all other attempts to resolve the situation have failed. Court action will be expensive, time-consuming and complex.

    Engage a solicitor who specialises in debt recovery to file court proceedings on your behalf, or check if your existing debt collection agency has an in-house team of solicitors who offer this service. Your solicitor will be able to advise you on the likely outcome of court proceedings, and whether there is an option to petition the court for your debtor to cover your legal costs.

    If your customer is unable to pay their debts, they may start insolvency, voluntary administration or liquidation processes as a solution. As a creditor, you may be able to make a claim to be paid the amount you are owed.

    Talk to your financial or legal adviser for further advice if your customer's situation escalates to this point.

    If you are not able to recover the debt, as a last resort consider writing off the bad debt in your tax return. Seek advice from your accountant or financial adviser.

    Managing late payments to suppliers

    Always try to pay your suppliers on time. If you're in a situation where you need to delay a payment, make sure you know how to manage the issues you may face with your suppliers.

    A good relationship with your suppliers can help if you if you need to request some flexibility.

    Build a good relationship through effective communication and by meeting contractual requirements in a timely manner. Paying your invoices on time when you can will give you a better chance for requesting an extension.

    Always be honest about your situation. Most suppliers will understand cash flow issues and may have experienced the same issue before.

    Check that your request is realistic and reasonable. If you approach a supplier with an unrealistic proposal, they’re likely to say no straight away.

    Don't fake information, misrepresent your circumstances or lie to a supplier about the reason you need an extended payment. Not only is your supplier likely to revoke any new terms offered, but you’re also unlikely to see any goodwill from them in the future. It could also damage your reputation in your industry.

    If your supplier doesn't initially agree to extend your payment terms, have a realistic plan ready to put to them.

    Think about:

    • the normal way of working in your industry
    • what you can offer them in return for a payment extension—the proposal needs to be beneficial to both parties
    • the payment terms you would be willing to offer your own suppliers
    • how much you owe, and how your request might impact their cash flow.