How to manage cash flow
Firstly managing cash flow is paramount for all businesses.
Revenue is vanity, profit is sanity, and cash is reality.
Secondly cash, what gets paid into your banks or your wallets/purses is the life-blood of any business. Cash is needed for a whole variety of things, including from paying bills, buying equipment, repaying loans and paying taxes. Insufficient or inadequate control of cash is one of the primary reasons for organisational failure.
That is to say a profitable business does not mean that your business will survive, grow and prosper. Moreover profit occurs when you sell something for more than it costs us to provide it. In addition that makes you profitable, but until the customer pays you don’t have that cash to pay for things. In other words this means that even a profitable business can run into trouble if the cash dries up.
It’s good practice to devise a good cash flow management strategy.
Include the following five key elements:
1. Check and manage profitability
Evaluate your current pricing and profitability on your products and services, look at your sales mix, where efficiencies can be made and where your costs are being spent. A decline in profitability can be caused by an increase in costs and no increase in revenue, an impact of discounting or a change in the mix of goods and services provided.
2. Produce a cash flow, monitor and manage it
As a result it is good practice for business to prepare a forecast cash statement on at least a rolling twelve-month basis. Your cash flow forecast should address three important areas
WHEN do you receive and pay cash?
WHAT do you receive and pay cash from/to?
HOW MUCH do you receive and pay cash from/to?
3. Manage the credit you give
Meanwhile have an effective credit control policy and don’t adopt the ostrich approach. Set out reasonable payment terms and do not be afraid to ask for partial or full payment up front. Payment terms can be up front, on delivery, or several days from invoice.
You may not feel comfortable doing it but keep on top of late payments and chase. Send reminder invoices promptly and follow up with a phone call if needed.
4. Have an accounting and business system fit for purpose
If you have regular inflow and outflow of cash, you can’t manage it in your head. Keep accurate up-to-date records of every invoice and transaction. Online (cloud) software like Xero will make this easier, so consider investing in a package if you haven’t done so already.
When set up and managed properly cloud accounting like Xero will give you and your business up-to-date and current financial information on profitability and cash flow, and is a powerful ally in keeping on top of credit control.
5. Make a contingency plan
In conclusion an overdraft or credit card facility can help to bolster any shortfall, but if your plan is to rely on these in the event of a cashflow problem, ensure your bank is willing to provide them, particularly at short notice.
And remember – you aren’t in this alone. Talking to your accountant or business advisor about the best way to manage cash flow can help you to build a better business.
Get in touch with us to find out more about cashflow and how to manage yours. For more business and finance , news, advice and tips, don’t forget to watch our weekly broadcasts, listen to our weekly podcast I Hate Numbers.