Cash Flow Essentials for a Business Owner

Here is an interesting article I came across about the importance of cash flow to a business owner.

Cash flow essentials
By Symon Brewis-Weston on Wednesday, 12 November 2008
· Getting cash flow right
· Cash flow management strategies
· Practical investments

Getting cash flow right from the start is important for any business owner.
As Symon Brewis-Weston discovers, a business is only as successful as its cash flow management practises so it’s important to understand how to get it right.

Poor cashflow management can bring down the foundations of any business, no matter how successful it may appear. So, whether you simply want to keep the business ticking over, or are planning to propel it to the next level, one of the easiest ways to reach your goal is by speeding up the cashflow cycle and streamlining your processes.

Efficiency really is the key to effectiveness when it comes to running a business; a little time invested now to get your finances in shape, could be the best investment you will ever make.

Back to basics
There are a range of variables that can impact the cashflow cycle and having the right levels of stock, the best payment facilities, well timed and organised accounts payable and receivables procedures, and the right types of bank accounts are at the core of successful cash management. Investing some time with financial advisors such as accountants, bookkeepers and business bankers to review these processes upfront will quickly set the business on the right path.
Keeping up-to-date and accurate financial records is also essential. These will not only help you keep track of all monies flowing in and out of the business, but will be useful further down the track if you need to seek additional financing or look to sell up.

Stock to sell
For most owners, inventory and wages comprise the major business expenses; they can also be among the most difficult to manage financially. It may sound obvious, but carrying excess inventory in the stockroom ultimately means less money in the bank. It also means that excess cash is being tied up in stock that could be diverted elsewhere across the business.
Every business is subject to seasonal fluctuations and stock levels should mirror this. Sales records will give a good indication of how much product is required each month and should be used to help you develop a tailored inventory order. This may be more time-intensive than lodging a standard monthly order, but in the longterm will be more cost-effective. It may also help to reduce unnecessary storage and staff costs, which would otherwise be required to manage the additional stock.

Paying up
When paying your suppliers, look at where you can make some savings. Paying on time is good business practice, but there is nothing gained from being too efficient with your payments and depositing money earlier than required. Remember, there is no penalty for paying bills on the day they are due, and the longer you leave the money in your account, the more interest it will earn.

Of course, it can also pay to negotiate early payment deals with suppliers, especially if you use a few regularly. Consider whether you can secure a discount for pre-ordering, or early payment.
Similarly, review your outgoings and think strategically about the timing of your payments. Make sure they aren’t all due at the same time otherwise you could be left short. Also, if you’re making large purchases that require periodic payment, try to structure these around other bills due in the same period.

At the most basic level, this could simply mean delaying the purchase for one week so that the bills will fall across different months. Alternatively, you could look for ways to make smaller payments more frequently. Leasing equipment instead of buying it outright could also be an option to free up cash that could be injected back into the business.
When it comes to wages, no small business can afford to be weighed down by excessive costs. However, it’s important not to sacrifice valuable personnel just to keep head count and costs down, as over time, talented employees will more than likely pay their way. If you’re a start-up business or experiencing a busy period, bringing in contractors can be a good solution as they won’t incur all the additional expenses and responsibilities associated with a full-time employee.

Cash in
When it comes to money coming in to the business, pricing and payment terms are the biggest influencers, and it can literally pay to get these right as quickly as possible. The key to pricing is to build in every cost associated with the product or service, including your own time, while ensuring that it reflects the market and is competitive. Your goal should be to make a good profit margin on your product or service, if you’re not, or if you’re not even breaking even, then you need to reassess your pricing strategy.

Simply put, the fundamental rule of successful cashflow management is to have more inputs than outgoings. If you aren’t generating this through your products or services, you will struggle across the rest of the business. Your business will also be put under strain if you don’t have an effective accounts receivable process in place. When it comes to collecting money from clients, timing is everything. Make sure you have clear agreements in place and issue timely, simple invoices with easy to understand language and payment terms. This is essential in getting payments processed quickly.