Cash Flow Management

Cash is “King”. Banks report that of businesses that fail, a large proportion of these is due to poor Cash Flow Management. This does not mean to say that the businesses concerned are not making a profit. Often quite the reverse. It does mean that the lag time, between paying their suppliers, staff and operating expenses and collecting their sales revenue is too big.

The other major contributing factors are inventory or stock control. Business who let their stock holding become too large in comparison to their average monthly sales will get into trouble.

So, what can businesses do to protect themselves against this grim reaper? There are many courses of action. The important ones I have detailed below.

Cash Flow Projection: At all times have in place a weekly cash flow forecast extended for the next 12 months. (This is not a budget as many cash transactions do not appear in your profit and loss). This forecast will highlight possible shortfalls well in advance. Forewarned is forearmed. Internal action may be able to be taken, if started early enough, to prevent a likely crisis.

Banks are wary of borrowers who require money now. They’d much prefer lending to you before you need it. Preferably months before. When the reason a business is short of cash is because they failed to plan, a banker may not be so interested in helping them out.

Inventory: At all times know the exact number and value of all stock items that you hold. Regularly balance stock through thorough stocktakes to prove what you think is what you have.

In addition, know what your stock turn is. That is the number your hold in stock versus the number you sell per month / year. Holding too much of something can be as big a killer as holding too little.

You need to know what level of stock is just right for your business.

Suppliers: Have a good relationship with your suppliers and negotiate as attractive a term as possible with them. Regularly check the price with alternative suppliers to ensure you are getting a fair deal at all times.

Check stock carefully when it arrives, including the invoice. Suppliers are all human and can make mistakes. Don’t just assume the number you have ordered or the price you have been charged will always be correct.

Customers: There are very few businesses where customers pay faster than suppliers. Business just do not often work that way. Have a good timely invoicing system in place. The faster you invoice the sooner you will get paid. Have a collection process. A lot of this can be almost automated. Remember the adage of the squeaky wheel. If you don’t follow up on a continuous basis, then your chance of prompt payment will be reduced.

They are “not your best customer” if they are not paying you.

Know what your debtor days are. There is a formula for calculating this and you must have this as a monthly target. Fail to do this and you may become a statistic.

Technology: Use technology to your advantage. There are a vast number of systems that will help you comply with the above with very little effort. Good cash flow management does not have to be a time breaker.

Set yourself up with the right tools and then you will stay afloat or even better have strong cash reserves.

Summary: If you need any help guidance or tips on cash flow management, check with the Prime Business Management Consultant in your area. They can quickly set you on the right path.