"Revenue is vanity, Profit is sanity, and Cash is reality"
We often look at revenue as the key indicator for success, if targets go up and they are met, we must be winning, right?
I’ve come across directors, and even business advisors, who focus on revenue without considering the cost implications. That’s where profit provides a much-needed ‘sanity’ check.
However, even highly profitable businesses can struggle if cash isn’t readily available to pay liabilities when they are due. For example, if customers don’t pay their bills on time, it can create a knock-on effect.
Following on from my earlier post about SME challenges, I'm focusing on cash flow because it’s a critical factor for all businesses, especially SMEs. Now that we’re over halfway through the financial year, we should all be across our revenue and profit KPIs.
Here are five key strategies that, in my experience, help keep your cash flow healthy:
1️⃣ Know Your Numbers – Regularly review your cash flow forecast to anticipate shortfalls. With interest rates remaining uncertain and the ATO tightening debt collection processes, it’s critical to understand your numbers. When will your term deposits mature? When are your biggest liabilities payable? Have you acquitted all grants and used all available funds?
2️⃣ Get Paid On Time – Offer incentives for early payments, tighten invoice terms, and follow up on overdue payments promptly. Clear and consistent credit policies make a big difference. Consider integrating Stripe for faster payments if you use Xero or MYOB.
3️⃣ Manage Expenses Carefully – Budget carefully and review your actuals v budget monthly. Keep fixed costs lean, negotiate with suppliers, and cut subscriptions or expenses that don’t deliver value. Items such as Rent, Utilities and Insurance costs keep increasing, make sure you compare at least three quotes before renewing your insurance policies.
4️⃣ Build a Cash Reserve – Having a buffer of 3 to 6 months of operating expenses can help you navigate unexpected challenges. Put funds aside into a separate bank account to cover tax liabilities, this will help reduce stress at tax time and avoid the need to request ATO payment plans or having to pay interest to the ATO (which from 1 July 2025 are set to no longer be deductible).
5️⃣ Plan for the Unexpected – Melbournians know only too well that you can’t trust the weather to be predictable and cash flow is no different. It isn’t just about managing today; it’s about preparing for whatever tomorrow brings. Consider potential risks like economic downturns, funding delays, client payment delays or supply chain disruptions and build a risk framework and contingency plan accordingly.
If you would like to discuss any of this, reach out. I’d love to chat!
[This article was previously posted on LinkedIn by Freya May Shaw, FCPA]