Prudent use of financial resources is key to business success. PHOTO | FOTOSEARCH
Cash flow problems —more money going out of the business than is
coming in — are among the most significant reasons that most companies
go out of business.
Cash flow isn’t simply about sales
or profits — it’s also about your business expenditure and your ability
to collect money owing to you. It is possible to have a good profit
margin or experience great revenue growth, yet run into cash flow
problems.
For example, you will not be able to pay
your rent on time or afford to buy stock because you are waiting for
customers who owe you large amounts of money to pay. Or your pricing
might be too low for your overheads. Here are some ways to take control
of your cash flow:
1.Monitor your cash flow
Managing your cash flow starts with understanding it better.
Look closely at the transactions in your business to understand your
monthly income and expenses. What are your major costs each month—rent,
salaries, stock, electricity, taxes and so on — and when do you pay
them? How quickly are your customers paying you?
Rather
than using an Excel spreadsheet or your bank statements to track cash
flow, consider investing in an accounting solution.
A
good software package will allow you to generate cash flow statements at
a push of a button, where you can see cash flow into the business —
customer payments, supplier refunds, tax refunds and so on — and out of
the business (expenses and payments). You’ll know that you have an
accurate and up-to-date view of your cash position.
2. Keep a forecast
Generate
a cash flow forecast and set targets for the next six to 12 months.
Again, an automated software solution will enable you to generate a cash
flow forecast.
It should allow you to manually tweak
parameters and numbers to cater for anticipated changes such as seasonal
variations in sales or annual supplier price increases. This will
enable you to make predictions about the gap between your income and
expenses and, if appropriate, take corrective action.
3. Keep on top of billing
Send
out invoices promptly and be quick to chase overdue bills. It is also
worth setting out clear payment terms with suppliers from the start of
doing business with them.
Get to know your customer
payment dates and do not ignore irregularities or delays — a poor paying
customer might be about to go out of business. Knowing when you are due
to be paid will help you keep on top of your cash flow.
4. Stay friendly with lenders
Many
businesses need a cash boost from a bank or lender every now and again,
particularly when they’re starting out, and might need credit or an
overdraft to get up and running. Stay on good terms with them and keep
them informed of any unforeseen outgoings or changes in forecasts.
By
developing a good relationship, based on trust, with banks and lenders,
they will be more likely to treat you favourably should your business
need future financial assistance.
5. Tighten up on your outgoing payments
Assess
the frequency with which you pay suppliers, tax bills, utilities and so
on — is it possible to pay in instalments or make terms more flexible?
Use
your powers of negotiation to strike deals that are favourable to your
business. Also, check on all those little things you spend money on that
can add up, with a view to identifying easy cost-saving opportunities.
Closing words
By
keeping on top of your cash flow you’ll be able to deal with problems
quickly and efficiently. If worried, talk to an accountant, investor or
business mentor.
The right accounting software can
give you a bird’s-eye view of your business and help you stay on top of
everything accounts related. It will help you manage your cash flow
easily and effectively, ensuring your business is kept in the best
possible financial position, before it becomes a problem.
Magnus Nmonwu is Regional director, Sage, West Africa.
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