Put simply, good cash management means ensuring there are sufficient funds coming in to meet the funds going out of the business. Forecasting cash flow, therefore, becomes an essential task. So what impacts cash flow?

1.     It’s all about timing

Even the most profitable business can go broke if they get this wrong. The timing of incoming and outgoing cash flow is critical. Visibility of cash flow, and the ability to accurately forecast future flows, is vital to the smooth ongoing operation of any business.

All businesses have some aspect of buying and selling, which involves trade terms with trading partners, both on the selling and buying side. Think for a moment what the cash flow implication might be if you make a purchase with a 10 day settlement in order to make a sale, at high margin, with a 90 day settlement. Technically you have made a healthy profit but the reality is your cash flow will be impacted for 80 days, during which time you still have a business to run and outgoings to manage.

One good strategy for handling such a situation is to speak with your financial institution before finalising trade terms about how it can help you marry incoming and outgoing cash flow.

2.     Beware the FX ‘blindspot’

Thousands of small businesses around Australia import and export overseas, which means they are exposed to the complexities of fluctuating currencies with every deal. For example, if you make a 20 minute sales call to China, the Australian dollar to renminbi rate will change before you hang up the phone – to say nothing of when you actually make or receive any payment – and so too, will the true value of the agreed invoice.

In the case of a $150,000 purchase, you will have determined going into the negotiation how much you can afford to pay for your goods. From that moment you’ve set a cost risk in your business. Add to this a 30 day settlement and a 3 per cent drop in the Australian dollar can see your purchase balloon to $154,500, potentially eliminating profit margins.

To gain visibility over cash flow projections, businesses must have systems or processes which can manage foreign invoices, including up-to-date foreign exchange rates that highlight exposures. Once a company has sight of their international cash flow, they can then look at instituting an foreign exchange hedging strategy that will protect them from fluctuations and ensure they don’t fall into unprofitable deals.

3. Avoid dipping into your own pocket

A recent East & Partners survey revealed 43 per cent of small businesses make up foreign exchange shortfalls by dipping into their own reserves or working capital. This can be a dangerous strategy because reserves should be a company’s last line against failure. Indeed, once reserves are exhausted, there is often no other option but to shut up shop.

A more prudent approach would be to speak to a financial services partner about securing a hedging facility which can help a company service its international invoices and keep its cash flow healthy. There are many choices in the market for this kind of trade credit facility, including non-bank financial institutions. Engaging with non-bank institutions for credit facilities can resolve cash flow issues and ensure hedging needs are not tied up with ones’ total bank loan portfolio.

Successful businesses prosper because they are able to mitigate the effect on their cash flow by factors they can’t see or control (such as foreign exchange markets). In short, they are proactive, strategic and seek help where required.

By taking a proactive approach, you will be able to maintain visibility of your cash flow (both current and projected) and give yourself the best chance of not just surviving, but thriving.