There comes a moment in everybody’s business when the discovery that the profit made in the business does not equal its cash flow is made. The value of a business is dependent on cash flow, not profits.
A business whose fixed assets base is high and/or requires high working capital, is likely to require more of the profits to be reinvested back in the business, thus reducing the cash available to service debt.
Cash flow is of vital importance to the health of any business. A saying goes: “Revenue is vanity, cash flow is sanity, but cash is king”. What this means is that whilst it may look better to have large inflows of revenue from sales, the most important focus for a business is cash flow.
Many businesses may continue to trade in the short- to medium-term, even if they are making losses. This is possible if they can, for example, delay paying creditors and/or have enough money to pay variable costs. However, no business can survive long without enough cash to meet its immediate needs.
- Managing cash flow is vital for a business’ long-term well being. Often cash inflows lag behind outflows, so a business may need to borrow or use cash from a previous period to cover the shortfall.
These seven tips should help improve your cash flow and ensure that you remain a going concern:
Mix Your Customer Portfolio
The majority of customers are customers that require once-off projects and more than likely we will not hear from them again until they have another project of a similar nature. This assumes that your service/product was satisfactory at first attempt. As a business owner one needs to identify customers into whom you are able to lock a contract for continuous retainer work, as this creates a steady inflow of cash allowing for easier budgeting. This ensures peace of mind that, at the end of the month, costs will be covered.
Take Advantage of Early Payment Incentives
Many suppliers will offer some sort of cash incentive for early settlement terms. This is great for your business, as it allows the freeing up of an amount of cash that was not available before to ease cash flow pressures.
Keep Up To Date with Your Pricing
Too often small businesses are forced to price more competitively than the more established businesses that have proven track records and brands on which they can rely. It can be detrimental if you do not keep up to date with the costs of inputs, as prices are forever fluctuating and it could severely affect your margins. This will make future projects strained, as there is less cash as would otherwise have been available to reinvest into the capital cycle. This also means taking into account future fluctuations when pricing for longer term projects.
Optimise Your Inventory Holdings
Businesses that hold inventory for trading purposes always run the risk of over investing in inventory. There is a fine balance between being able to service demand, and not over investing in stock, tying up cash in inventory.
Prolong the Payables
When paying your creditors, always endeavour to stretch the payments as long as possible without damaging the relationship with the creditor, as you always want to come back and make use of that line of credit in the future. Holding on to your capital for an additional week could provide your company the opportunity to invest in other projects.
Shorten the Receivables
Extending a line of credit to a customer goes a long way to building a relationship that will last. Yet all too often this becomes a hindrance to the company’s operations, as the customer has tied up valuable cash flow for a number of weeks that could be utilised elsewhere to grow operations. Managing these relationships will come with experience and knowing your customer.
Don’t Underestimate the Power of Budgeting
Budgeting is such a powerful tool for management, as it forces businesses to constantly look to the future and have goals and objectives to work towards. Regular budgeting gives businesses the ability to identify any opportunities as they arise and understanding whether the business has the resources to take this opportunity.
Applying these principles in your business will take a lifetime to perfect, yet they will most definitely optimise your cash flow. This will go a long way to giving your business that fighting chance in a competitive marketplace.
This article is courtesy of our partner Moore Stephens: http://southafrica.moorestephens.com/Home.aspx
You can see the original article here.