1. Cash flow rules
Watch these three vital metrics: "Collection days" is a measure of how long you wait to get paid. "Inventory turnover" is a measure of how long your inventory sits on your working capital and clogs your cash flow. "Payment days" is how long you wait to pay your vendors. Always monitor these three vital signs of cash flow. Project them 12 months ahead and compare your plan to what actually happens.
2. Cash flow forecasting
Start the budget process with a break-even analysis. This is the equation that shows a business’s base cost to provide its product or service. Most business owners, preoccupied with covering daily expenses and making payroll, don’t perform the analysis annually.
In a world where revenue is uncertain, the idea is to keep fixed costs to a minimum to run the business, and then really manage variable costs. This enables you to be more proactive about managing expenditures and matching the revenue levels you’re anticipating.
3. The balance sheet
To make and understand the balance sheet of a company, you have to know all the assets and liabilities. Start by classifying them as long-term or current. Current assets are those which give benefit for a year or less. Long-term assets are those which give long term benefits. Current liabilities are those which will be paid within one year. Long-term liabilities are those which will be paid in the long term.
4. Working capital is your best survival skill
Working capital is an accounting term for what's left over when you subtract current liabilities from current assets. Practically, it's money in the bank that you use to pay your running costs and expenses and buy inventory while waiting to get paid by your business customers.
5. Inventory control
Inventory typically represents 45% to 90% of all expenses for a business. It is critical to the accounting process and to the health of your business overall that you employ proper inventory control to protect your precious capital. Start by making sure there are regularly scheduled counts.
That way you are more likely to catch errors or miscounts in the various stages of the inventory life cycle (raw materials, in-process goods, finished goods). This objective practice becomes a check and balance for both the individual components and final product.
6. Refine your inventory mix
It's a common error among small retailers to hold too much inventory. Identify your best-profit and fastest-turn items as well as your low-margin and slow-turning merchandise. Eliminate the items that are clogging up the system and leaving too much money sitting on store shelves.
7. Re-evaluate fixed expenses
Many business owners don’t focus enough on fixed expenses like rent or insurance when setting their annual budget, even though those base expenses represent the largest bite out of cash flow. Switching medical aid providers or moving offices if location isn’t critical to a business could result in substantial savings. You may also speak to your landlord and try to renegotiate your rent; in a tough economy, you have some leverage.
8. Schedule a monthly check-up for tax purposes
By performing a monthly analysis of income and expenses, you’ll know what your tax bill will look like at the end of the tax year. Tax analysis requires keeping books on a cash basis as well as an accrual basis. Many business owners keep books on an accrual basis — recognising receivables and payables, and then for taxes adjust books to a cash basis — the difference between taxable income collected and cash expenditures made, which is taxable income. This is an important part of the cash flow planning process as you will not be surprised by a big tax bill.
9. Evaluate variable costs every six months
By regularly auditing variable expenses such as office supplies, you can ensure you’re spending money only where it’s necessary. Whether times are good or bad, it’s always a good idea to lock in cash flow.
10. Maximise cash flow
Smooth out the peaks and valleys of income by offering prepaid payment discounts or monthly subscriptions. On the accounts payable end, make sure your payments are on time to avoid fees and late charges.
11. Set aside funds for emergencies
Create a reserve fund to handle unexpected debts that are outside the range of the business’s usual operating budget. Maintaining contingency or reserve money as protection against possible loss in the event of an emergency situation can be very helpful.
The contingency fund may be used when unanticipated repairs or replacement of key manufacturing equipment take place. It may also be used to cover general operational expenses in the event that the sales of the company take an unexpected dip.
12. Plan for major expenses
Put events like a major computer upgrade on the calendar at least a year in advance. Acknowledge the seasonal ups and downs, something many entrepreneurs are reluctant to do. By planning for the major expense, you'll avoid taking money out of the company during the flush periods only to find yourself short in the slower months, when costly projects like upgrading computers or replacing factory components usually happen.
13. Lose the lease
There are so many flexible work options now – from co-working spaces you share with other companies to letting workers telecommute part time or even work from home. Explore how your company could lighten its fixed costs by lowering its real-estate commitments.
14. Streamline management costs
Automate accounts receivable, customer-lead management, and employee-productivity tracking. Coordinate real-time tracking of these figures so you know who's pulling their weight and who is not.
15. Pay bills when they're due – not before
Only pay bills early if a vendor offers a discount for doing so. Otherwise, keep your money in the bank until the moment you must pay it out.
16. Get better terms
If you're finding the business is short of cash every month around the 15th, adjust your payment schedules with vendors so their bills aren't due until the 30th. If you currently pay bills in 15 days, see if you could make it 30 instead.
17. Manage your information
The quality of your information will determine the quality of your business. You can only make good business decisions if you have excellent data that you can refer to on a regular basis. Setting up a management information system for your business is central to your long-term success.
18. Setting up an accounting system
The best time to set up an accounting system is before you start your business. Prepare a complete business plan, giving clear sales goals for every day, week and month. Estimate expenses in every key area and project your expected profitability (or loss) for every month.
19. Monitoring sales
One of these keys to business health is determining your cash flow. Add up your total sales revenues each day, week and month. Determine the number of individual sales you’re making in each time period and the average size of each sale.
Look for trends in each of these numbers. Analyse the quality as well as the quantity of your sales. Determine the gross and net profit you’re earning on each sale and the profit you’re earning per customer.
20. Change the rules
In today's marketplace you'll need to generate more sales while at the same time reducing expenses, especially administrative fat. To grow sales without adding costs, try cross-selling – offer new services or goods that complement your current offerings. To cut costs, see what processes you can automate or outsource.
21. Track expenses
A credit card that you use solely for business can be a basic accounting system. Most card statements categorise expenses, so you can see which outlays relate to which business activities.
If you always use your business credit card for business expenses, you're less likely to pay cash and then lose the receipts, forfeiting tax write-offs in the process. Jot down business trips, lunches, coffee dates and other events with cash outlays. This habit can go a long way toward substantiating those items for your tax records in the event of an audit.
22. Record deposits correctly
Adopt a system for keeping your financial activities straight, whether it's a notebook, an Excel spreadsheet or software such as QuickBooks. Business owners typically make a variety of deposits into their bank account through the year, including loans, revenue from sales and cash infusions from their personal savings.
The trouble is that at the end of the year, you or your bookkeeper might erroneously record some deposits as income, and consequently pay taxes on more money than you've actually made.
23. Keep a close eye on your invoices
Late and unpaid bills impact your cash flow. Assign someone in your business to track your billing. Then put a process in place for issuing a second invoice, making a phone call and perhaps levying penalties such as extra fees at certain deadlines. You need to have a plan for what happens if they're 30, 60 or 90 days late. Every late payment is an interest-free loan and hurts your cash flow.
24. Tighten your credit terms
If you have too many late-paying customers, revise your credit terms and offer less credit. Consider using a collections agency to get stragglers in, or charge a late fee.
25. Extending credit
Do your homework. Investigate a prospect's history of paying creditors. Ask for references -- and then check them. Be picky about who you offer credit to. If you have doubts, ask them to pay cash. Or offer a small amount of credit and test the waters before you extend credit for larger amounts.
26. Give customer payment options
These options can include payment plans, using credit or debit card, online payments, cash, money orders, and so on. It makes good busniness sense to do this as people like to have options.
27. Don’t rush the debt collection process
Be patient. Too many collectors try to go for the quick fix so they can get paid and move on to the next account. Successful collectors know that patience is a virtue and that rushing the collection process often leads to not getting paid.
Take the time to gather information before contacting customers, and think carefully about possible solutions. This could be the critical step that helps you avoid the major mistakes you make when you rush, some of which can involve breaking the law.
28. Hone debt collecting skills
Money and debt collection remains the most highly charged human communication interaction, and we all have to deal with debt-related issues in the present economic climate. Honing debt collection communication skills will help to build trust and inspire confidence with your clients. An irate or unhappy client whose debt issue is dealt with professionally by a skilled debt collection agent can be turned into a debt management partner.
29. Managing debtors’ emotions
When managing debt and emotionally charged client interactions, it is important to first deal with your client and their heightened emotional state before you try and resolve the debt issue. Clients cannot think rationally and logically while they are emotionally whipped up, and it is therefore essential that the emotional aspect of the debt problem is addressed first. Once you have dealt with your clients’ emotions, the debt problems usually shrink down to a manageable and solvable size.
30. Be confident when collecting debt
Confidence is key to successful collecting, but don't make the mistake of being arrogant, rude or cocky. The truest confidence is demonstrated by your belief in your ability to reach a win-win agreement with the customer. This confidence is gained through experience, and the more debt collections you do, the better you will become at it.
31. Get credit insurance
Managing your company's cash flow is a tough task when you're not sure your clients will pay what they owe. Credit insurance policies cover your accounts receivables, insuring your business in the case of non-payment.
You tell the insurance company which accounts you want to cover, and you pay a monthly premium based on the creditworthiness of your client and the amount of credit you're extending to that client.