Cash is king when it comes to the financial management of a growing company. Many businesses, even profitable ones, fail due to poor cash control. The delay between the time you have to pay your suppliers and employees and the time you collect from your customers can cause problems, and the solution is good cashflow management.
The key to good cashflow management is to prepare well in advance. An accurate cash flow projection can alert you to trouble well before it happens. A business needs to be aware of what its capital requirements will be, in order to be able to plan.
Sound management of trade debtors (people who owe you money) and trade creditors will be key. The basic idea is to improve the speed with which you turn materials and supplies into products, stock into receivables, and receivables into cash. Here are some specific techniques for doing this:
- Offer discounts to customers who pay their bills rapidly
- Ask customers to make deposit payments at the time orders are taken
- Require credit checks on all new non-cash customers
- Issue invoices promptly and follow up immediately if payments are slow in coming
- Track accounts receivable to identify and avoid slow-paying customers. Instituting a policy of cash on delivery (c.o.d.) is an alternative to refusing to do business with slow-paying customers
- Invoice factoring is a means of turning your receivables into cash but, of course, comes at a cost
To give your business the greatest chance of success, it is worthwhile planning. Also use your business plan to help forecast your future cash needs. Start the application process to get the right type of finance for your business now and remember how long it can take.
Read part 1 of this post, about cashflow finance.
Glenn Collins is Head of Technical Advisory at the Association of Chartered Certified Accountants (ACCA). Read his previous post on cashflow finance, and visit the ACCA website for more tips and helpful information.
1 comment
Add a comment
Alan J McCafferty
January 30, 2013
Glenn,
Excellent articles on Cashflow Management. The important thing for those new to cashflow forecasting is to start forecasting right now without delay and don’t worry that you might not get it all correct on day one. Once you have a forecast set up you can then refine your figures and assumptions. The more you work with it the better it will become.
Alan