Did you know that the most common cause of failure of small businesses is a shortage of cash to meet running costs? This happens because of poor cash management. Do not let this happen to you. Take control and manage your cash effectively to minimize the risk of failure. To do this, you have to understand two fundamentals of cash management: Cash and Cash Flow.
o Cash – In this context, what is meant by cash is the actual amount of money available in the bank or in the business. It does not include inventory, either does it include receivables or fixed assets such as property. Though these can be potentially converted to money, they are not liquid, and since they can not be termed ready cash. In other words, cash is what you can use immediately to pay the bills and keep your business running.
o Cash flow – This reflects to the movement of cash in and out of a business. Cash coming in is what you receive from customers, lenders and investors. Cash going out reimburses the payments you make every month for salaries, supplies and interest to creditors. If the cash inflow exceeds the outflow, a company has a positive cash flow. A positive cash flow is a sign of good financial health. In the opposite situation, a company is said to have a negative cash flow, a problem to say the least!
How do you beat this? To begin with, develop a cash flow projection. This should be a two-fold project – short-term (with a weekly or monthly periodic) cash flow projections to help manage daily cash needs, and long-term (ranging from one to five years) cash flow projections to finance your larger business requirements.
For small businesses, the need for cash flow management is primarily to avoid extended cash shortages, a common occurrence when expenses for purchase of materials, payment of license or permit fees and fees may have to be made before the business gets paid by its customers.
How can you close this cash flow gap and keep your business solvent? Shorten your cash flow conversion period by following 5 easy steps that can help bring in the money faster:
1. Collect payments promptly – Send out your invoices the same day goods are shipped, not a week or two later. Indicate on your invoice when payment is due, and specify the penalty interest for late payment.
2. Track accounts that are overdue – Actively pursue unpaid accounts. Call the companies and send reminders letting them know that their account is past due and the steps that will follow should they not pay.
3. Cut expenses as much as possible – Take a hard look at the expenses column on your cash flow chart. Are all the expenses listed in that column really necessary? Are there things you can do without? Is there anything you can find a cheaper deal on? Answers to these questions will probably end up saving you quite a few dollars.
4. Account for people not paying on time – Remember, people do not always pay on time. In fact, they need to be reminded more than once that payment is due. When making your cash flow projection, account for the fact that it usually takes people longer to pay you than you think. In case you're offering a long credit period, communicate with the company at least four weeks before the invoice is due to make sure it gets paid on time. You might even offer your customers a discount for paying their invoices early.
5. Project a 'worst-case scenario' – Always overestimate your expenses and underestimate your income. This will allow you to plan and be prepared for cash shortages.
To keep your business up and running, you have to have money coming in regularly. Track your cash flow closely so that you can predict potential problems and take steps to remedy them.