Cash is King

An old age saying, but never more true than today. It gives your business that cutting edge advance than nothing else does. It is the lifeline of your business and nothing is more valuable for the growth of your business or providing you with the means of having an advantage over your competitor, more than having surplus cash or sufficient cash to increase your buying power. It provides the opportunity to negotiate better discounts by purchasing in bulk or grab that special before your competitor, secure your ranking in a production line or secure your container space on that vessel.

You’ve done your sales budget, you’ve planned your sales forecast and procurement, but more than anything else, you need to plan your cash flow, daily if need be, but at least one a week. In fact, cash flow matters so much, managers of businesses must do everything in their power to increase it and sustain it.

A simplified definition of cash flow is: it is the money that is moving in and out of your business each month. It is the process of monitoring, analysing, and optimizing the net amount of cash receipts minus cash expenses. Net cash flow is an important measure of financial health for any business.

The lack of cash availability is one of the biggest reasons why small businesses fail, of course it could be true for any type of business if the cash flow is not well management. There is nothing else that will close down your business faster, then running out of cash money.

Managing your cash flow and cash management are in particular important during the first six months when you are starting out your business and if you don’t have enough cash to carry you through this time, your chances for success aren’t good. Suppliers often won’t give credit to new businesses, and your customers may want to pay on credit, giving you a cash shortage to deal with.

Businesses that experienced rapid growth often experience cash flow challenges as the expansion generally involves higher labour costs as new employees are hired, higher rent is paid for additional space, increased advertising costs, and more capital investment for new facilities and or equipment. Maintaining increased levels of inventory can also eat into your excess cash.

Credit extension to other businesses is another common way for businesses to run into cash flow problems. Invoicing is normally done on 30- or 60-day terms and often customers delay payment, which can leave a business with a cash flow deficit.

There is a vast difference between cash and profit. Your business might be generating a profit, but you are short on cash. How does that happen? Profit is an accounting term, the difference between your income and expenses, whilst cash is the money in the bank and available for paying suppliers, purchasing inventory, pay salaries and expenses or maybe invest some spare cash for growth and or for capital investment of new machines. Profit doesn’t pay the bills. You can have assets, like inventory and accounts receivable, but if you can’t timeously collect what’s owed to your business, the business won’t have cash. Cash shortages can be a sign of trouble within your business

So how do you become cash flow rich and build reserves?

There are seven quick ways to improve your cash flow:

1. Upfront payments

One of the best ways to get payments in the door quickly, is to ask for payment upfront, in particular when you are a start-up or during the first twelve to eighteen months of your business.  You could ask for a 30% or 50% deposit, with a progress payment of another 20% three quarters through, with a final payment when the goods are ready to be delivered or the service is completed.

2. BBE Supplier Development

If you are doing business with medium to large business customers, you could negotiate with them to pay you within 14 days of invoice date, as part of their BBE supplier development criteria.

3. Extending supplier terms

Another consideration is to look into renegotiating or extending terms with your suppliers. Suppliers are usually willing to extend payment terms from net30 to net60/90 to loyal customers. You could ask for an early payment discount. You’ll have to pay sooner, but it may lead to a smaller payment or alternatively, you could make weekly smaller payments for one or two of your largest suppliers, which will lessen the cash burden at month-end.

4. Prompt payment collections

Ensuring the prompt collection of client payments helps reduce the risk of cash shortages. Run your debtors age analysis reports weekly to review your outstanding receivables. Follow-up promptly with those customers who have fallen under their agreed payments terms outstanding and resolve any discrepancies earlier rather than later to ensure prompt payment.

5. Timely reminders of late payment

Run your aged accounts receivable reports weekly and ensure prompt follow up with those clients who have fallen under outstanding payments. If there are discrepancies you can catch the issue earlier rather than later and it is easier to resolve the issue and receive prompt payment.

6. Offer discounts for quick payment

It is a good idea to offer a small discount to those who pay early, so it gives them an incentive to pay early, for example offer your customers 2.5% settlement discount if the pay on the 28^th of a month or 3% discount if they pay on the 25^th of a month or a 5% discount if they pay within seven days of invoice issuance.

7. Vat planning

Vat is not your money, you are a third party collection agent on behalf of SARS and as such you have to Plan for your every second month Vat payments and bear in mind that VAT refunds could take up to three, four or more months to receive. Account for these numbers in your cash flow to ensure that you are not caught off-guard for these outflows.

The bottom line is cash management is a vital part of your business. In order to remain competitive, you will need to implement a cash management system or a cash flow report to ensure you will have the cash to pay your bills and purchase inventory timeously. In the next article we’ll look at compiling a cash flow and look at some of the cash ratio’s to measure your business performance.