Managing your cashflow is vital
As a business owner, you need to understand the things that impact on your cashflow and how to manage them.
Your cash operating cycle is hugely important, particularly in times of growth.
Management of cash can be the difference between success and failure even in a buoyant economy. Those businesses that keep tight control on cash are far more likely to prosper in both good and bad times.
The basic flow of cash is:
■ Goods purchased
■ Creditors — creditors paid
■ Goods sold
■ Debtors — debtors received Managing each step is the difference between good and poor cash management
Controlling costs — ensuring no slippage of cash with unnecessary expenditure.
■ Review contracts and supply agreements for pricing and terms.
■ Managing credit terms that assist with cashflow while satisfying creditors’ expectations.
■ Discounts, ensuring that terms are met to make the most of these.
■ Paying early might make you look good but won’t help your bank balance.
■ Only carrying stock needed
■ Can you order as required rather than carrying stock?
■ Don’t be fooled by volume discounts — carrying excess items could outweigh the discount.
■ Selling old stock at a discount may be better than carrying it until it’s obsolete.
■ Invest in a stock management system — savings may outweigh the investment.
■ Stock in business vehicles — incorporate into any stock management system. It often adds up to a considerable dollar value.
■ Invoice regularly — don’t wait until the end of the month
■ Set payment terms and be clear about them — set your payment expectation.
■ Be firm with debtors.
■ Chase outstanding debtors early, as soon as they are overdue. Have a plan for when a debtor doesn’t pay. At what point do you stop working for or supplying them?
■ Invest in systems for accurate up-to-date debtor information.
■ Ensure your deposit details and options for payment are on all invoices and statements to enable ease of payment by customers
■ Ensure cashflow isn’t being absorbed in purchasing longterm assets. If purchasing larger long-term assets ensure you have worked through the impact on your operating cash cycle before spending the funds.
■ Overdraft — if you spend the whole year in overdraft it could be worth reviewing with your bank to see if an amount could be transferred to term debt which is generally a lower interest rate and can be set to be paid back over a period of time.
■ Review interest rate and terms regularly with your bank. ■ Build a great relationship with your banker and keep them informed of how you are tracking and what you have coming up.