Cash management is something that is critical in any business at any time. Yes, cash is a priority in your business, but when conditions are unpredictable, you must be particularly astute about cash management.
It does not matter whether your business is absolutely thriving; you may have abundant cash resources, but you still must be careful on how you manage that cash.
Of course, if your business is struggling and you are battling to pay your bills then you must be extremely clear on how the situation can be improved. A couple of principles which underlie good cash management are:
Profit ≠ Cash Flow
The bad news is that you may have extended periods of profitability in your business, but that does not necessarily ensure you will always have cash at hand when you need it. But there’s good news because, if you look at the cycles in your business and how your business operates then you may be able to predict when those cash holes will occur; particularly in a mature business that is easier than a brand-new business.
If those cash holes can be predicted, managing these instances can be achieved by speeding up the inflow of cash or it might be getting invoices out more quickly or delaying your payments to suppliers so that you can avoid those cash holes. If you do that, there’s more good news because you can create policies, procedures, behaviours and habits in your business which make those things normal and will avoid those cash difficulties.
That is a huge benefit for management who can avoid the stress of worrying about cash problems and they can thus focus their attention on something more productive in their business.
Avoid Credit
Now, one part of this is borrowing. Some of you will say, well, yes, but the cost of capital right now is extremely low, we ought to be borrowing. But that by itself is not a good reason to borrow.
What you must focus on is the clear and positive return on investment may be able to be achieved by borrowing. You need to get back way more for those funds than you ever pay for those funds and it needs be the best use of our funds as well.
The other side of credit is trying to avoid giving credit to others. Often in many industries, we allow our customers to pay us, over time, you extend credit to our customers and because it is the industry standard that does not make it the right thing to do. After all, you have to manage your business first and foremost. If you do not do that, you will never be able to serve those customers. So, let us focus on credit policies which make the most sense to our business.
Avoid Discounting
Another technique that some businesses use when they run into cash difficulties is discounting. This can be an intelligent strategy. You might encourage your customers to pay up front because of those discounts or they may even order much more.
But you need to be careful because when you discount, you are firstly getting less for your investment in the products you are making available in the market and you may not be able to cover the bills later. Secondly and quite often your customers would have paid you the full amount for your products in any case.
Use Cash from Sales for Investments
Now, here is a really important point, your business has an underlying business model.
That means that you are offering a product which the market wants and the market is willing to pay for and if that is the case, you will be able to generate cash from sales from your revenues. That cash ought to be used and put at risk, not cash from outside sources and especially not until you have validated that your business model is working.
So have a good think about your business model in your business. Can you say that your customers absolutely want your products and are willing to pay the prices at which you are offering them? If so, you should be generating cash from those sources. You must be clear on that topic in your business.
Finance Processes Matter
This may sound a little mundane, but it is extremely important if you can get good at invoicing. Invoicing on time, invoicing accurately, procuring from the right vendors and paying the right prices, collecting the money on time and ensuring our accounts payable process is advantageous to your business.
This will really help you in cash management.
We hope you benefited from those five ideas on cash management. This is general information only. Contact us today for an obligation free chat about you and your business.