With the New Year underway, now is a good time to re-commit yourself to making money this year. The saying “Cash is king” might be a trite expression, but it really is vital for all small businesses, especially when you consider that poor cashflow is the top reason for business failure. This means that getting on top of and remaining in control of your cashflow is essential for business success.
Neglect your cash flow and you’ll taste the pain and suffering that comes with failure in business. Take good care of your cash flow and you are on your way to financial security.
One the easiest ways to take care of your cash flow is to stop making the same mistakes every year that are literally draining your business of cash. Take action now and make the commitment to plug these cash flow leaks so you can put more of your hard-earned money in your pocket. Below I have highlighted my 5 top tips to managing and improving your cashflow in 2016.
1. Understand Your Peak and Trough Cash Month
All businesses have peek and trough months, for some they are more evident than others. A peak cash month is a month where your cash balance is generally at its highest points during the year. The trough cash month is just the opposite.
Here’s where many business owners make a big mistake with their cash flow. When they are in their peak cash months, they feel really good about their cash flow because they have a nice cash balance. Then they make decisions that use or commit that money without realising that they will need this to get by in leaner months. The result is a “cash flow problem” when the inevitable trough month arrives and there is not enough cash to get through that period.
In my opinion, this is one of the major killers of small businesses today. So look at your business cashflow over the last 3 – 5 year. Plot it on a graph if necessary to help you visualize its and then identify trends in your cashflow. What are your peak months? When are you most likely to expect a bad month?
Truly understanding your business cashflow into your business will really help you plan and make informed decisions, for example you can use this information to inform your marketing, maybe plan a special offer or sale during your trough months to boost your income.
2. Understand your business expenses
Take the time to list all of your business expenses, everything, month by month. This then gives you your breakeven point for every month, the amount you need to generate in the month just to cover your costs and keep your business going.
Now if you overlay your costs against your income, this is an easy way to identy when you will experience potential cashflow problems.
Are there any months where there is not enough cashflow into the business to pay your costs? Are there times you have excess and can this money be held ready to cover the costs in your leaner months?
By doing this it will help you understand whether you really have money to invest in new opportunities or equipment. It can also help identify times you may need to source additional funding. Banks are far happier to lend to businesses who really understand their business finances. It is also a good idea to speak to your accountant about this and make sure that you have included all costs. They can also then help you identify opportunities to reduce your costs and better manage your cashflow.
3. Pay Special Attention to Capital Expenditures
Capital expenditures is a category that can surprise you unless you actively manage and control it each month. A capital expenditure is recorded on your balance sheet rather than as an expense in your income statement. The cost of the asset you purchased is then depreciated over the life of the asset.
As a result, you don’t see the cost of that expenditure show up immediately in your income statement. It’s this accounting treatment for capital expenditures that makes it so important that you manage it closely — very closely.
I worked with a client once that learned this lesson the hard way. They did a good job during the year of keeping their expenses in line with the budget. The big surprise came at the end of the year when the president realised that capital expenditures had more than doubled during the year. Capital expenditures totaled almost $200,000 for the year compared to less than $100,000 the previous year.
What happened? Management was so focused on the income statement and keeping expenses down that they let over $100,000 leak out of the company through the “back door.” There was no capital expenditures budget. There was no accountability for how this cash was being used in the company.
4. Watch Accounts Payable Closely
One of the things you want to watch out for is whether you are improving your cash flow by not paying your bills as they become due. I can’t tell you how many businesses I have seen that boosted their cash flow temporarily by dragging out payments to vendors without ever addressing the underlying problem. The problem that needs to be addressed is the one causing cash flow to be so tight in the first place.
The fact they you have to pay your bills late should be like a fire alarm going off next to your ear. If you ever get to the point of not be able to pay your bills on time, stop and take the time to find out why. Is it an accounts receivable problem, an inventory problem, a revenue or expense problem, etc. Find the cause of the problem. This will put your attention on the area of your business that is leaking the cash. Then you can put your time and energy into plugging the leak.
5. Evaluate Your Terms
If you’re having trouble with cash flow, check to see how well your customer terms and supplier terms are balanced. Are you having to delay paying suppliers because your customers are not paying you within your payment terms or are your payment terms to lenient? If your average payable is 24 days and your average receivable is 47 days, that’s 23 days where you are having to find cash to fund your business. So maybe you need to get better at collecting money owed to you, consider discounts for early payments or maybe collect half or all of the money upfront?
Basically look at your terms and think if there’s a better way of doing things, a staggered payment schedule may be appreciated by customers as it helps them manage their cashflow. Also review your supplier terms, how do they stack up against others in the marketplace. You might also discover that you’re missing out on a discount if you were to pay even earlier. That might sound counterproductive, shortening that receivables-payables gap, but the money involved might be worth it.
Remember, your success in business will ultimately be determined by the degree to which you create, and hang onto, your cash flow. This is not a nice to do but an essential activity if you want your business to be a success. This does not mean that you have to do it alone, consider a bookkeeping service to help you manage all your invoices and payments. Also speak to your accountant or call us today. We can help review your cashflow, reduce costs, identify opportunities for your business and generally help you ensure your business is a success.
Check out of free guides and tools to help you manage your business cashflow.