Managing your cashflow

Often, businesses aren’t paid until one or two months after they’ve completed work, but they still have to pay their bills. Cashflow management is about making sure there’s enough money to pay the bills even if you haven’t yet been paid. Here’s a simple test. Do you ever fall into overdraft by mistake and have to arrange a quick meeting with your bank manager? If the answer is yes, you have a problem.

Even if you’re trading profitably, you can have cashflow problems.

Say you sell $20,000 of stock for $40,000, but don’t get paid for 60 days. Before the money comes in, you have to re-order the $20,000 stock and pay expenses such as rent and wages. If you can’t meet your obligations, someone you owe money to could force you into receivership – even though you’re trading profitably.

How to stay out of cashflow trouble

Don’t neglect the books

Make sure your accounts are accurate and up-to-date. That will help you see cashflow problems coming before it’s too late.

Many business owners find book-keeping a chore and don’t think it’s a productive side of their business. They get wrapped up in producing the goods they’re going to sell, leaving no time for the books. They run the risk of being forced to close because they can’t meet their debts, even if their businesses are successful.

If you do the books regularly, and pay attention to what they’re telling you about your business, you’ll not only be in a better position to manage cashflow, you’ll also have a better understanding of what makes your business profitable and where your expenses are mounting up.

Even if you get someone else to do the books, take a detailed interest in what they show.

Plan ahead

If you use cashflow forecasts, you’ll know in advance whether there’s going to be enough money in the bank to pay your bills. By looking ahead, you’ll know when you can spend and when you need to keep money back – for example, January and February might be quiet months but you might have bills due. You’ll also be able to avoid any unpleasant surprises such as unexpected bills for tax or supplies.

By planning ahead, you can put money aside (or make borrowing arrangements) well in advance to meet your commitments.

Preparing a cashflow forecast

If you’re getting into cashflow trouble

If you find you’re getting into cashflow trouble, there are several things you can do:
  • Tighten your debt collection efforts to bring cash in more quickly.
  • Avoid drawing funds for private use during difficult periods.
  • Consider a sale of slow-moving stock to generate funds quickly.
  • Negotiate an overdraft facility with your bank, but avoid staying at the peak of your overdraft limit for long periods. Using outside credit may help, but borrowing is best used to help your business achieve its long-term goals rather than as working capital.
  • If you’re going to seek help from the bank, do it early. The better you anticipate a cashflow crunch and make suitable plans, the more your lenders will respect your business skills. What they won’t respect is you rushing to them for aid in the midst of a crisis. If you seek help early, you’re also buying time to find other sources of support if the bank doesn’t help.
  • If a cash crisis occurs despite your best efforts, inform your bank and creditors before payments are due. In the case of creditors, you could make a part or progress payments that demonstrate your good faith and intentions to settle your debts.
  • Get professional advice. Don’t let a lack of cash or poor profitability stop you from getting the help you need.

Control your own cash

If your business is always short of cash, you’d better examine your cash handling procedures. Some cashflow crises are caused by embezzled funds. It’s not enough just to sign the cheques yourself. Mistakes or fraud can occur when people are ordering goods or handling cash that’s coming into the business or preparing the cheques for you to sign.

It’s a good idea to involve two people in each transaction, so there’s a cross-check. For example, one person could check the invoices that come in and another could prepare the cheques or payment slips for you to sign. Or one person could open envelopes and date-stamp the contents and another could check the money inside.

If you have to be away from the business, have at least two employees sign the cheques. If an employee asks, 'Don’t you trust me?', tell them it’s not a question of trust, it’s a question of being businesslike in your procedures.

 
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