How do you manage the flow of cash in your small business? This is possibly the biggest single issue that keeps small business owners awake all night. This happens because, in running a business, Cash is King.
Cash is to a business, what air is to a living organism. When a business is unable to generate and hold cash, when a business is running out of cash, the business is showing the sure signs of imminent death.
A business needs cash to pay its suppliers. It needs cash to produce and/or deliver its products and services. It needs cash to pay the salaries and emoluments of staff. It needs cash to improve and re-invest in the growth of the business.
A Small Business Owner who cannot efficiently control the flow of cash in and out of his or her business will inadvertently weaken the capacity of your business as a going concern. Whether by yourself as the Business Owner, or by delegation to a proxy, how you manage your cashflow will determine whether the business is growing or struggling.
As a Small Business Owner, effective financial management is essential for the success of your Start-Up or Small/Medium Enterprise. Here are three tips to help you manage your cashflow and improve the chance of your business to survive and thrive:
- Plan Your Finance, Finance Your Plan: Get your money ready and waiting, before you need it. Neither you nor your business can function optimally if you or your business is always looking for money. That is a clear sign of desperation and a recipe for disaster. Shortage of working capital spells gloom for your business, hence it is important that you have enough money to run long enough before the business starts making money. Translation: Plan how to finance your business, and have the finance in place before you open for business. What must be done? Four tips:
- Have a Business Plan, and a Budget for the Business.
- Know how much money you will need, and when you will need it.
- Get the money ready, or have a trusted source it will come from.
- Expect the unexpected. Provide for contingency.
- Fast-Track Your Receivables: If your business operates on a cash and carry business, you do not have a problem with collecting debts, otherwise known as receivables. But, as is the case with most businesses which sell on credit, and give payment periods ranging from a few days to many weeks and months, there is need to speed up the collection of receivables.
The basic idea is to shorten the time between turning supplies and man-hours into products and services, and collecting cash from your customers, for products delivered and services rendered. A short turnaround is best for your cashflow, and vice versa. Some actions to consider include but are not limited to:
- Prompt issuance of invoices along with delivery of products or rendering of services, matched by constant follow-up and requests for payments.
- Discounting of invoices in return for early settlement of such invoices.
- Pre-payment for Products or Services in return for agreed discounts.
- Multiple and alternative channels, including online and offline, to make it easy for debtors to send in their payments with minimum effort.
Pursuant to the foregoing, it is important to have a credit control or debt recovery unit, even if it is a one-person department. That way, getting the cash in must be somebody’s job, not everybody’s responsibility!
- Slow-Track Your Payables: While you are fast-tracking your receivables, you must take the opposite tact of slowing your payables. You must stay on top of your expenses. You must continuously look for cost-cutting opportunities. You must cut and/or avoid expenses, and delay payments, with the overall objective to reduce the demand on cash. A failure to manage the outflow of cash could kill your business. Here are some strategies to achieve these:
- Develop an eagle-eye for all business expenses, big and small. Review them regularly.
- Eliminate expense items that increase outflows but don’t inhibit performance of the business.
- Where there are alternatives to spending cash, use them.