It does not matter how much business you generate, or how many tenders you submit, or even how busy you are, if no cash rolls in, your business will struggle to survive. Monitoring cashflow should be the primary focuses of business owners, yet so few actually do this because they are busy working in the business. A weekly glance at the bank balance generally substitutes for proper cashflow forecasting.
Think of cashflow as the lifeblood of your business. Without it, your business will quickly wither away and die. It is as simple as that. Having a bucket load of cash owing to the business because you have done a heap of work and issued invoices galore is of no use, as the cash is not sitting in your account. In fact, without that proper cashflow management, all the extra work may be detrimental to your cash position.
Getting more cash into your business is simple if you know what affects it and how to change that effect. There are the obvious things like create more revenue and reduce expenses that directly affect cashflow. But more significantly collecting receivables and controlling stock/work-in progress whilst keeping payables within terms has a greater impact on cashflow. Your capacity to manage and monitor
these Balance Sheet items, will determine your long term business success. Small 1 day or 1 percent improvements in these vital statistics will make a significant cash improvement to your business.
Your accountant should be providing you with the tools and knowhow of cashflow forecasting. If cash is king and the lifeblood of your business, what good are financial reports and a tax bill nine months after the end of financial year to predicting forward cashflows? The most important aspect of all successful businesses is their capacity to manage cashflow via the Balance Sheet as described above. This applies to large mining companies, big retailers, and mum and dad businesses everywhere.
I recently had a conversation with two clients who were on different sides of business transactions with a large timber company. One did work for the entity, and the other bought goods from it. In the conversation it emerged that the business that was owed money by the large entity was paid 60 days after invoice, however the business that owed the entity money was made to pay within 14 days of invoice. This is an example of best practice cashflow management – collect your receivables and negotiate better terms for payables.