Smart Cashflow Management

For a lot of businesses, especially new ones, success is a matter of survival more than anything else and in order to survive it’s important to remember this one principal. Cash is King!

Without a ready stockpile of cash, the ability to meet ongoing operating expenses will become problematic. The reality of why so many small businesses have not survived the recent recession is because they did not have access to cash when their income suddenly nosedived.

First of all what is cashflow? It’s important to not confuse cashflow with profits. Profit will support the growth of your business, contribute to the value of your business and pay back long term debt. Cash is what you need to pay those everyday expenses such as suppliers and employees. As an example; if your customers pay you 30 days after purchasing, then you will not receive that useable cash until the following month, yet that sale will still register as profit.

In order to control your cashflow you need to take to do the following.

- Make sure your accounts are up to date. This should be a daily task.

- To boost cashflow you can raise prices and increase sales.

- Sell off surplus assets and equipment.

- Get rid of slow moving stock by discounting.

- Make sure you invoice your customers as soon as possible.

- Follow up on invoices as soon as they are due. Some business’s will not pay unless they are chased, so it’s perfectly acceptable to start calling your customers the day they are due to remind them.

- Keep a close eye on your debtors. If you have debtors regularly falling behind in their payments change the way you bill them, by insisting on payment up front or stop dealing with them until their accounts are cleared. Remember you are effectively loaning other business’s your cash interest free.

- Make sure your customers understand your payment terms by making it a central part of the supply contract.

- Cash cheques as soon as you receive them.

There are other effective methods to get customers to pay on time or even better, early. Offer a prompt payment discount, perhaps for payment within seven days or payment at time of purchase. This might just be a short term fix to get cashflow moving, but it’s a common tool for business’s to use and a quite attractive way for your supplier’s to save money, especially if you point out on their monthly statements how much they could have saved had they used the facility.

Probably the easiest, and most neglected, way of solving cashflow problems, is to review the cash that is leaving your business. Keeping an eye on costs, especially during difficult times, can be an extremely effective way of keeping the bank account under control.

- If times are difficult, the easiest and perhaps least painful cost (from the business’s point of view) that can be targeted is your own drawings or salary. You might not like the idea much, but remember; short term pain for long term gain.

- Review your employee expenses. Reducing employees is never an easy step, however during difficult times it is a necessity that cannot be avoided. Start by reducing the number of hours you have them working or maybe look at linking performance more closely to pay.

- Try and negotiate better terms with your own suppliers.

Remember that most businesses that do fail, fail because they do not have the cash to meet their financial commitments, and not necessarily because they are unprofitable. Keep a healthy cash reserve aside for rainy days and above all, make sure you maintain a good relationship with your bank, because it will be they that you turn to as a last resort.