What is Cashflow?

Simply, the flow of cash through your business – it is the process of collecting, disbursing and accumulating cash. It can be positive – you are able to pay your business costs when they are due and to have some left over OR…It can be negative – you simply do not have enough cash from your business trading to meet your business costs – this means that you need to borrow or contribute personal funds.

The Difference Between Profit and Cashflow

Why do profitable businesses go broke?  Because they have not managed their cashflow well – their profit is tied up in stock, Work In Progress (what you need to produce your products), debtors (customers who haven’t paid yet but have your stock), or capital expenditure (equipment, cars, computers etc). 

Sales are not converted to cash in time to pay creditors, the tax office or loans.  Businesses often don’t take into account their cashflow before making capital purchases (equipment etc that has to be paid for before you use it within the business).
 
In this economic environment we need to:

• return to basics
• not expect that the way we did business in a booming economy is appropriate for an economy that is not doing as well – remember the definition of insanity – doing the same thing over and over and expecting a different result.  We must be relevant and be prepared to change and adapt quickly.
• know our customer, understand the likely change in buying patterns and recognise that we are operating in a different business environment where the buyer responses are different.

The impact of not understanding the flucuations your business goes through with cashflow seasonally and during varying economic clients is serious and it’s being seen in the latest statistics on business insolvency – in businesses going under.

Creating Robust Cashflows

Let’s have a look at some of the facets of our businesses which we should be reviewing so we can create robust and health cashflows: 

The “Cashflow Cycle”

This is a typical example of the Cashflow Cycle.
It may seem on the surface that a service or a professional business is not affected to the same degree that a retail or manufacturing business may do, but ALL business are impacted by the gap between investing in the product or service for resale and the receipt of payment.

Each business will have its own variations that will have an impact on the end result.

Cashflow Potholes

During challenging economic times we find the following occurring that create cashflow potholes:

1. Stockturn reduces because customers are buying less
2. Debtors increase as customers take longer to pay – it takes them longer to get money in the door so they take longer to pay you
3. Creditors are fighting their own cashflow problems so are being more assertive and insisting credit terms are adhered to – so you’re being required to pay up faster

9 Tips for Create Positive Cashflow

So to make cashflow a positive element in your business and take a bundle of stressful elements away, here are nine great tips for making sure you have a healthy and robust cashflow:

1. Take care with stock lines affected by obsolescence.  Be aware of changing customer buying patterns and adapt quickly. Offer this stock on sale or as a “value add” in a bundle of products and get them out the door and freeing up space for income generating products.
2. Adopt “just in time” maintenance of stock levels so you can reduce the amount of money you owe to your creditors.
3. Be alert and proactive with debtors, undertake credit checks, offer prompt payment options and get money from them in the door as quickly as you can.
4. The easiest way to get cash in the door quickly is to simply remove 60+ days from invoices! It should ONLY have two categories... 30 Days and Overdue.
5. Be selective about who you give credit to. Insist on cash or have the customer use their credit card and only slowly offer them limited credit terms once the relationship is established.
6. Prepare a “cash flow forecast” to alert you to future likely cash needs so you can manage accordingly. This can be done in Excel and kept to being a very simple and effective tool that includes a calendar of known costs and outgoings like tax, wages, electricity, rent, insurance etc.
7. Have a budget and review that against actual expenses each month. This is a great management tool you can also create in Excel.
8. The key to successful cash flow management is communication – with debtors, creditors, lenders, employees, when people are informed they can much more easily accommodate change.
9. Lastly, “implement” what you decide to do. Remember, “the power of an idea is in it’s implementation”.