So you’ve had the idea for a while and you’ve finally started your business. The orders are coming in and you are trying to keep up with demand, but something is not adding up. On paper sales are on target, the orders have come in, goods have been delivered, but your bank account is in the red. Why is that?
The goods delivered have been sold on credit and you have to wait to collect, but you still have to find cash to pay for materials and services to keep filling new orders. The problem may lie in the management of your Cash Flow.
But what is Cash Flow and how is it relevant to your business?
What is Cash Flow?
It is the tracking of the movement of money into or out of your business. The best method of managing your cash flow is by preparing cash flow projections yearly, quarterly or even weekly depending on your circumstance. An accurate cash flow projection can alert you to potential trouble well before it strikes.
Best practices suggest that you delay cash outlays for of as long as possible while encouraging anyone who owes to you money to pay it as rapidly as possible, because a sale is not a sale until the cash is collected. Never assume without justification that receivables will come in at the same rate at which you outlay. Receivables have to be managed closely.
Preparing a Cash Flow statement
Start with cash in hand and cash to be received from various sources to determine how much is coming in and when. Determine how much has to be spent and when before you spend. Have a line item for each item that has to be covered with cash during the projected period. It is during this process you will see where the gaps lie.
Here are some areas to examine:
- Keeping accurate records: Ensure that the accounting software you use is able to provide you with accurate reports of monies due to you and those you owe.
- Review credit arrangements: The credit terms you extend to your customers must be closely tied to the credit you receive from your suppliers. You cannot extend too long a credit period when you receive a much shorter period. You should review your suppliers and the credit terms they offer with the view of getting better credit terms.
- Extending too much credit: Extending credit is like a bank giving a loan. They conduct their due diligence and ensure your credit worthiness before they grant a loan. You need to take the same level of care and ensure that your customer has a good track record of paying on time before approving credit. And once you extend credit do not extend too much credit too fast.
- Improve collection of receivables. Don’t assume that customers will always pay on time. The businesses that follow up are usually the ones that collect. Create a process in your business around collecting receivables and ensure that it happens in a consistent manner. Don’t wait until you run out of cash. This could be as simple as ensuring your accounting software generates a report on a weekly basis.
- Review your costs. Look at your cost of production. Are you getting the best prices, are your processes as efficient as they could be? Often times business owners get caught up in the day- to-day running of their businesses and do not keep up-to-date accounting records. This leads to not enough data to inform decision making. Ensure that the accounting software you use is simple enough that you can easily input data and produce the reports you need to run your business more efficiently.
- Pricing: Are your products accurately priced? Do you take into account your all your costs, such as your overheads?
- Accumulating stock that does not move: Your accounting software should give you a good idea of your faster-moving products and, therefore, inform how you acquire stock.
- Review your operating budget to see if you have enough working capital in place. The general rule of thumb is three to six months of operational costs, however in our tight economy this is often very difficult. We would recommend a minimum of two months to give you enough cushion to cover any unforeseen events.
- Unexpected market changes – don’t put all your eggs in one basket. If that major customer leaves will your business survive?
Running a new business has its fair share of challenges and you don’t need to make all the mistakes yourself. Learn from other people’s mistakes and don’t be afraid to ask questions. After you get your Cash Flow in order, find out if you have what it takes to be a successful entrepreneur in Jamaica.
Share with us: how do you manage your cash flow?