According to the old adage, profit is what the accountants tell you but cash is king. A sale might contribute to an accounting profit but cash flow might tell a different story. Payment from that sale might be deferred as a result of giving credit to the customer.
At the same time, you have to pay suppliers and staff. You might also have to invest in rebuilding depleted stocks and buying new equipment. If cash receipts lag cash payments, the business could suffer a short term cash short call. In the worst case, it could be making a profit and going broke.
Unlike the standard profit and loss table, an analysis of cash flow takes in many more variables such as accounts payable, receivables, costs, inventory and work in progress.
There is another excellent reason why cash flow management is important. When you have your cash flow under control, it frees you up to focus your energies and talents on your customers. It allows you to work on the business instead of in the business.
In a downturn when companies are scrambling to get money in through the door, cash flow makes or breaks the business.
Here is a 10-point plan for managing cash flow
1 Create a cash flow forecast
The forecast should tell you who you are paying, when the payments are due, who is paying you and when that's coming in. The forecast also sets out all your costs for the month. A good forecast model can anticipate problems so you can take action to avoid them. It can be used to develop assumptions on sales, costs, credit and funding to produce monthly cash flow projections well ahead and assess the impact of cash flow on future sales, costs and credit terms. You also need to factor the replacement of assets, such as office equipment and cars. The important thing is not to do it on the back of an envelope or in your head.
2 Invoicing
The golden rule for good cash flow management is to invoice more frequently, rather than doing what so many small businesses do and leave it to the end of the month. Consider this: if you have $40,000 a week coming in and you leave it for two weeks, that's $80,000 less to work with. Invoice as soon as the job is done.
3 Payment up front
Depending on the relationship with customers, the strength of the business and the particular job, it might pay to collect a good amount up front before the job begins. Some businesses, for example, might settle for 40 percent up front and the rest of the payment on the work when it is completed.
4 Triage payments
This is done frequently in the construction industry where payments are staggered across the process. The first payment comes when stage one is completed, the next when the second is done and it proceeds through various agreed payment points.
5 Provide discounts on early payments
Some companies offer incentives for early payments, like 2.5 percent off the price. Some offer discounts for payment several months in advance.
6 Avoid cash
Many small business owners carry cash. This is best avoided as the folding stuff has a tendency to slip through the fingers. As soon as the cash comes in, it's best to bank it. Ensure that all payables are done electronically. Whenever possible, use a business credit card for travel, meals and your minor expenses. This leaves more cash in your hands and defers payment.
7 Manage your receivables
Create a schedule of what's owed and stick to it. Call in overdue accounts and make sure you understand the debt recovery procedure. Debt collection agencies can provide a pro forma letter for late-payers. Also, you might consider adding a late payment fee.
8 Monitor costs and inventory
Remember that inventory consumes cash. You have to purchase before you can sell it and regardless of whether or not you sell it, your vendors will want to be paid. Every dollar you spend on inventory is a dollar you will not have in cash. Check through your costs carefully to identify items you don't realise are costing you.
9 Make sure you are on good terms with your bank
If you know you're in for a short-term shortfall, make sure you have a plan and keep the bank in the loop. It is important they understand your business and its growth potential.
10 Structure the timing of your payables accordingly
Negotiate terms with suppliers to stretch these out. By doing that you are creating an interest-free line of credit. At the same time, however, don't do this at the expense of a solid relationship. You need to work with them and you need them there to help through the tough times.
And don't forget the most fundamental rule of cash flow: cash in the bank is not money in the pocket. Don't be tempted to splurge the lump sums when they come in.
-1.jpg&w=100&c=1&s=0)
.png&w=100&c=1&s=0)
