Why is Managing Cashflow crucial for your Business?

You have probably heard the saying “Cash is King“. Cash flow not profit can be the difference between business success and failure. At first glance this may not make sense but hopefully I can clear it up for you.

Cash flow management involves managing the timing of cash in and cash out. In general the objective is to get your cash in before you have to send cash out.

A few tips to managing your Cash-in are following.

What is the key driver to generating Cash-in to your business? That’s right, Sales!

Most retailers are fortunate because they are cash businesses and receive payment at the time of making the sale. But, if you sell goods on account to your customers it is crucial that you minimise the amount of time between the date of the sale and the collection of the money from those sales. Leading credit reporting firm Dun & Bradstreet reports that the average number of days that a customer takes to pay its bills is currently 53.2 days. That is almost 2 months between making the sale and banking YOUR money!! The frightening news is that some businesses are operating with debtor days out to 90 days and beyond. Effective management of your debtors can have the same effect as an additional client or two!! Best practice debtors management commences when you first start working with a new client, not when you find out that you have made a sale and are trying to recover the money from that client. For more on debtors management click here.

Other ways to improve the balance of your bank account include optimising your Inventory on hand and Retiring Assets that don’t add value to your business.  Inventory is crucial to retailers and wholesalers, having the right level on stock to meet your customers demand is the holy grail but if you don’t have the right systems in place it is much more difficult than it sounds. Setting appropriate re-order levels on your accounting software and understanding the time it takes from re-order to delivery will help to ensure that you have just the right amount of stock on hand.

When ordering perishable stock it is critical that you get your stock levels right, I mean throwing out rancid food products is just like throwing money out!!

An absolute No-No is holding on to obsolete stock!! Holding stock that does not sell ties up money on your shelf that would be better in your bank account. Don’t let your ego get in the way, and hold stock with the view that the market will improve. Analyse the probability of this objectively and if it is unlikely that your market will improve, then sell it, even if it is at cost. Remember, it is better in your bank than on the shelves gathering dust!!

Likewise, holding plant and equipment that add no value to your business should be sold and the cash banked or better still invested in assets that add value to the business.

A few tips to managing Cash-out are.

What is the main driver of Cash-out of your business? That’s right Expenses.

The objective when managing suppliers payments is to delay payments for as long as you reasonably can without disturbing the relationship with your supplier. Once again, the plan is to collect money from your customers before you need to pay it to your suppliers. Obviously you cannot do this when it comes to salary and wage payments, superannuation or taxation commitments but where possible you should try to defer payment. For more on manging supplier payments click here.

If you purchase plant & equipment for use in your business another tip is to match the timing of the payments to the timing of the use of that assets.  That is, organise equipment hire purchase or leasing. This will defer payment of cash out of the business over the life of the asset rather than taking a chunk of cash out of the business in one lump sum.

For more on managing cash flow our specialist Newcastle Bookkeepers have the skills to help you make the most out of your cash and ensure that your bookkeeping problems are solved quickly. For a complete list of bookkeeping services contact Shelley on 0412 481 559.

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