Cashflow management

Cashflow is the life blood of any organisation and without it, the organisation withers and dies. A business can be profitable but still end up in Receivership/ Liquidation because the cashflow wasn't managed correctly.   Poor Cashflow management is one of the main reasons for business failure

Definition:

Cashflow management is the process of analysing cashflow patterns, forecasting cash inflows and outflows, organising the treatment of surpluses and deficits and creating contingency plans to deal with unexpected variations from forecast.   Monitoring  the activities which generate cash inflows and outflows and adjusting business plans accordingly to ensure the business remains viable.

Business analysts report that poor Cashflow management is one of the main reasons for business failure.

Cashflow management is easy isn’t it, you just send out the invoices and they pay? Yeah Right. If only it was that simple. There are many steps you need to take to get your Cashflow management in order.

Simple steps you can take to manage your Cashflow:

• Don’t buy fancy cars, machinery etc without organising how you are going to pay for these first
• Budget and set aside money for PAYE, GST, FBT and provisional tax every month
• Explain to the customer up front the process of the sale, the invoicing, the credit terms and the follow up if the account is not paid on time
• Reduce the amount of extended credit you give (or your clients take)
• Charge interest on overdue accounts
• Make sure in your own mind that the customer has the ability to pay the account on due date before giving credit
• Follow your "gut instinct". If the deal doesn’t feel right then walk away
• Have a backup line of credit unused and available at all times
• Pay your suppliers on due date. In the event of a crisis you will get a much more sympathetic hearing with your suppliers if you have previously paid them "current"
• At the first sign of trouble talk to your major suppliers and tell them you may be late paying this month
• Don’t have all your dealings with the same bank, keep business and personal banking separate (especially the mortgage over your private residence)
• The main point to remember about Cashflow is don’t spend it until the cash is in the bank

Cashflow terms

Negative Cashflow:   If the cash out of the bank exceeds the cash into the bank for the month the business has a negative cashflow (bad).

Positive Cashflow:   If the cash into the bank exceeds the cash out of the bank for the month, the business has a positive cashflow (good)

A negative cashflow usually shows up as the following:

• Your banker has you on his or her speed dial
• Poor collection of outstanding accounts
• Increased stock holdings (no point making it if you can’t sell it)
• Obsolete stock increasing and not being moved on
• Suppliers being paid later and later leading to "Stop Credit" notices
• Increasing overdraft

At some point in time, this situation, if it continues, will result in a severe financial crisis for the business.

The simple moral of the story is you can’t spend more than you earn for any length of time otherwise you will go broke.

For a full list of the steps to take in relation to debtors, click on the link to the Self Help Page and select the size of business.

Part of this information was sourced from the U.S. Small Business Administration

For more information