Cashflow is like air – it’s not important until you haven’t got any

February 16th, 2010

It’s the old stoy of not recognising how important something is until its gone.

Think of the things we take for granted on a typical day:

  • Our health
  • Relationships
  • We’ll have enough food to get through the day
  • Our job or business being there tomorrow
  • The internet
  • Power steering

Cashflow is like the oil that keeps the car engine working.   It helps lube all parts of our business whether we are paying creditors, buying stock, having working capital, paying ourselves/staff or buying new plant.

A lot of people I talk to take their cashflow almost for granted – it’s only when there isn’t enough that it suddenly becomes all consuming and important.

‘The future is determined by what we do in the present’ – Mahatma Gandhi

So what are some things to think about when managing cashflow in your business:

  • Key metrics
  • Payment terms
  • Capital purchase v leasing
  • Knowing your customers
  • Stock management
  • Debtor recovery
  • More cash coming in than going out

Key Metrics

Information is power and you need to have key metrics that tell you exactly where you’re business is at any one time.   I’m not talking about your P&L, but numbers you look at on a daily/weekly basis.   These might include:

  • Client contacts
  • Number of sales
  • Work in progress
  • Retention payments due
  • Average sale value
  • Quotes
  • Billable hours

By understanding these key numbers, cashflow issues won’t suddenly sneak up on you

Payment Terms

Can you ease your cashflow by:

  • Negotiating better payment terms with your suppliers or creditors
  • Pro rata payments over longer periods
  • Work out a payment plan
  • Outline expectations early

Capital Purchase v Leasing – what’s best – consider

  • Do you have funds for the capital purchase
  • Is it better to expense off in a period rather than wait for depreciation at end of year
  • If capital purchase do you have funds available for any R&M
  • If leased what does the supplier cover
  • If a capital purchase will the item (especially technology) become redundant before it has reched its ‘used by date’
  • If leased are you able to terminate early if you need to and what will the cost be
  • Where benefits doers your accountant/advisor see in either option

Knowing your customers

  • Who are you extending credit to
  • What research have you done on them
  • What is the risk to extend credit to them
  • Who else supplies to them
  • What trade references are they able to provide
  • What is their integrity like

Stock Management

  • What is the ‘ideal level’ of stock you require
  • How do you measure your stock levels
  • Is inventory controlled by a computer system or is it your ‘eye’ that does te ordering
  • How often do you need to turn your stock
  • Do you measure stock to sales and adjust accordingly
  • Is it better to bulk purchase or order when required and manage mall cash outlays
  • Does the stock have a used by date and if so how do you manage that
  • How often do you stock take to ensure there is no ‘shrinkage’
  • Are there clear guidlines around who is allowed to order stock and what $amount

Debtor Recovery

  • How often do you monitor your debtor ledger
  • What is an acceptable amount for it to be at
  • Who is responsible for debtor recovery
  • What is the proceedure if the account is past its due date
  • Do you have Tewrms of Trade
  • Are you consistent dealing with outstanding debtors

More cash comingi n than going out

Business is a pretty simple operation – remember if you have more cash coming in than going out you are well on your way to manage your cashflow.   If you have more money going out then soon you will find you are going to come to a cashflow chokepoint.   Any of the factors above and a million more can cause this, so as a business owner it is vital that you continually monitor and manage your cashflow.

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