MANAGING CASH FLOW EFFECTIVELY

Managing cash flow is key to success. With planning, efficient handling of income and expenses, and the right tools, small to medium enterprises (SMEs), and franchises can thrive.

Cash flow management means tracking and balancing the money coming into and out of a business. For franchises and SMEs this includes handling income and expenses like salaries, rent, royalties, and taxes, while ensuring financial stability.

Key strategies for cash flow management

1. Forecast Cash Flow

Plan ahead to predict future financial needs and avoid shortfalls. This helps franchises, for example, prepare for royalty payments and marketing fees and helps all SMEs prepare for seasonal sales changes and planned maintenance costs or upgrades.

2. Optimise Receivables

Receivables are the amounts you are paid by customers for your business’ products or services. Slow payers and uneven income may lead to your business running out of cash.

• Bill customers quickly.
• Encourage early payments with incentive discounts.
• Make it easy for customers to pay you.
• Follow up quickly and firmly on overdue invoices.

Example: A restaurant franchise with a lot of tourist customers could offer a range of multiple secure payment options, such as credit cards, bank transfers, online payments, and mobile payment solutions to help collect payments efficiently.

3. Manage Payables 

Payables are the amounts you owe suppliers of goods and services to your business: these can include rent, electricity and other utilities, as well as equipment, stock or the ingredients you need to make your own products, for example.

• Negotiate flexible payment terms with suppliers. Your franchise system or buying group may have negotiated favourable terms with suppliers.
• Prioritise essential expenses like rent and utilities.
• Talk to your business banker about working capital facilities to cover seasonable requirements or unexpected expenses.

Example: A small business can free up cash by negotiating a payment schedule when they purchase new equipment.

4. Monitor Inventory

Avoid tying up cash in extra stock on the shelves. Use systems like ‘just-in-time inventory’ to keep operations smooth.

Example: A clothing store can cut storage costs by increasing inventory turnover.

5. Reduce Costs

Look for savings by outsourcing, automating, or renegotiating contracts.

Examples: An SME may outsource marketing to reduce expenses, while a franchisor negotiates bulk supply discounts for their franchisees.

6. Handle Specific Obligations

Franchises may have unique financial needs: 

• Royalty Payments: Franchises must allocate funds for regular royalty fees owed to franchisors.
• Marketing Fees: Most franchisees make contributions to a franchise-wide marketing pool.
• Taxes: Set aside money for all your tax requirements, including GST, PAYE and Income taxes – and don’t ‘borrow’ from your savings for tax.

Example: A gym franchise pays monthly royalties and marketing fees through direct debits, while an SME bakery focuses on managing property rent and equipment maintenance.

Cash flow reporting and forecasting

Managing your cash flow effectively makes your business more resilient and stable. By planning, tracking and monitoring your cash flow, you can make more informed decisions. One important way to do this is by using cash flow reporting and forecasting.

Cash flow reporting lets you look back and see what typically happens with cash in your business. You can spot seasonal trends and patterns, which makes your forecasting more accurate. Cash flow forecasting shows how much money your business is likely to have in future – a week, a month or even a year from now. It projects your likely income and outgoings across a period.

Having a forecast helps you spot potential crunch points and plan ahead for them. This can make your business less stressful to run and gives you more time to focus on more important things. It can also save you money, giving you time to organise your money so you’re less likely to need a new loan or overdraft. This will also make your discussion with your banker a lot easier and effective.

You can create your cash flow forecast using a spreadsheet (Westpac offers a downloadable template on our website), or by using your accounting software. However, the best option is to ask your accountant to work with you on a forecast, because their expertise will make the process easier and more accurate.

Helpful Tools 

Accountants can help create forecasts, track expenses, and meet tax regulations. Your bank can assist through, for example, resources like the Westpac Cash Flow Guide that includes practical steps and templates.

You can find a free cash flow forecasting template, real life examples and advice in the Westpac Smarts video Getting Greater at Cashflow and Westpac’s full set of guides for small business, including the Westpac Cash Flow Guide at https://www.westpac.co.nz/business/tools-rates-fees/business-base.

And if you think you may be struggling with cash flows or facing problems managing all the ins and outs, involve your financial advisors early on, so they can help you turn things around.   

About the author

Daniel Cloete is an Area Manager Business and the National Franchising Manager for Westpac.

Contact the Westpac Franchise Team on 0800 177 007 or Email: franchising@westpac.co.nz

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The information contained in this article is intended as a guide only and is not intended as an exhaustive list of matters to be considered. Persons entering into franchise agreements should seek their own professional legal, accounting and other advice.