Cash flow is the lifeblood of any business; If you don’t have it, your business won’t grow. However, many business owners struggle with the management of cash flow. When the cash that’s coming in and the cash that’s going out don’t balance you find yourself in a cash flow gap which in many cases can be hard to climb out of.
Cash flow should not be confused with financial profit or bottom-line (shown on the profit and loss statement). Cash is liquidity, most of us understand it; it is the inflow of cash that is available for the acquisition of assets, pay debt down/off, invest, etc. Profit is recorded in the financial statements when they are earned (accrued) rather than when the money is actually in hand. A business' cash flows and accounting profits must of the times does not occur at the same time. Due to this difference, it is important the your business generate reports that track the cash position and cash flow at a given time. This difference is such that many companies go broke eventhough their financial statements are showing a profit, which I know it baffles many business owners. Sound cash management is the instrumental to the survival of any business. Successful business owners put their money to work for them productively.
My advice to the business owners is to go beyond the traditional profit & loss statements and analyze cash flows. If you have an accountant, bookkeeper, or CPA helping you with your business financial activities, ask them to help you understand the cash flow of your business. Without monitoring your cash—measuring it, investing it, borrowing it, and collecting it—you will must likely end up in trouble with creditors and in bankruptcy.
Having "enough" cash means having enough cash available at the right time. Poor cash flow can mean the loss of attractive opportunities such as the chance to buy inventory at bargain prices or to pay vendors early in exchange for discounts. This applies to all type of businesses and families, regardless if you are organized as a nonprofit organization. A nonprofit organization that poorly manages it cash flow will have a limited reach and will lose grants as a consequence of this.
What are signs of cash flow trouble?
• Cash on hand has been declining for several months
• Receivables are taking longer to collect
• Payables are increasing
• You’re putting aside bills that you typically pay on time
• You’re unable to pay yourself a regular salary
• You’re getting calls from vendors asking about invoice payments
• Your inventory levels are increasing
• You overdraw your checking account expecting new sales to cover it
• You loan the business personal funds to meet routine expenses
What can I do if I have Cash Flow Problems?
Before you borrow more, consider the following:
1. Accounts receivable - many times you have the cash in your balance sheet. Review your receivables turn over ratio and your collection policies. You may want to consider the factoring of receivables if possible.
2. Equipment - if you have excess equipment, consider the sale of the excess equipment to improve your current cash flow situation.
3. Inventory Management - Money tied up in inventory can dramatically impact cash flow. Retailers should regularly gauge their inventory turnover ratio (cost of goods sold divided by the average value of inventory) to make sure it is within industry norms. Old or outdated stock should be cleared out through end-of-season sales to turn stale assets into liquid ones. Manufacturers can use supply-chain management tactics to have just enough inventory on hand to keep product lines running and meet customer commitments without tying up critical cash.
4. Debt restructuring - negotiation of the term of your existing debt, for example lowering your interest rate on your loan or even establishing new payment terms that can provide the necessary cash flow needed today.
Tips to Prevent Cash Flow Difficulties
• Keep a tight grip on bookkeeping and your cash flow. A great way to keep an eye on your business’ cash flow is to balance your business’ books at the end of each month.
• If your business allows customers to be billed for your services or products, then make sure that you have an invoice ready when their items are delivered. This way, you don’t add to the time that they have to pay the invoice if they are on a net-30, 60, or 90.
• Have clear customer credit policies. Keep an eye on customer’s credit lines with your business and when you start to see problems with an account, cut their credit line back to help prevent a large loss. This is a great way to see which customers are paying on time, and which you need to work on.
• Provide an incentive for customers who pay their invoices on time, such as a 2-5% discount off their entire order if they pay before the 30 day mark. This will help your invoices get paid faster, since most customers will want to get that discount, no matter how small it is.
• If you provide services, develop a deposit policy to help cut down on up-front expenses. By placing a deposit on your services, you already recoup some of your costs, and your customers aren’t as likely to not pay the invoice since they have already put out part of the total up front.
• Hire a good credit and collections person(s). Having someone who knows how to handle credits and collection issues will also help to cut down on overdue invoices and missed payments.
• Hire a good bookkeeper, not necessarily the cheapest one. To be successful you need to surround yourself with qualified professionals. Work closely with that person and empower that person so he/she can help you manage your cash flow. Depending on the size of your business, you may need a professional that acts as a CFO for your enterprise. If you cannot afford a full-time CFO, hire one on a part time basis.
Successfully managing the cash flow of the company requires an active participation from the owner or an assigned office manager and a clear understanding of the costs of operations and the efficiencies of accounts receivable and inventory. Also, successful cash flow management requires consistent measurement and input from your several advisors; banker, accountant/CPA.
No comments:
Post a Comment