Your brilliant ideas are no match for poor cash flow management. How to avoid the carnage.
“Cash is king” has to be one of the oldest, most-used statements of our time, even more than “the president is applying his mind” . . . even more than whistful wonderings like, “to be, or not to be” . . . even more, still, than “pay back the money”.
Yet, like bulls and bears, supply and demand, the natural flow of a free market economy, its truth has no less impact on business today than the time of the “shekel”, an ancient valuation unit used in Mesopotamia around 3000 BC (for those who want to know).
History lessons aside, the bare bones fact is that many, if not most, startup businesses (especially) fall prey to poor-performance of this most critical component to business success, leaving a plethora of brilliant ideas and game-changing concepts on the heap of despair and misery, buried underneath a pile of mismanaged money.
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It’s not an exact science of course and even the most positive, or balanced, budget can go the way of the Dodo due to unforeseen circumstance.
The best you can do is have a plan A, have a plan B, a plan C . . . control the ship and steer it to calm waters as often as possible.
While you may be well aware of the following 5 tips for effective cash flow management, it certainly cannot hurt to revisit them, today.
Create a budget
“Well obviously” you say, rolling your eyes and reaching for your mouse to close this article but hear me out; there are many entrepreneurs and senior company executives alike who do not create thoughtful, sensible, logical, budgets at all . . . let alone being disciplined in continuously monitoring the (in and out) flow of cash.
Factors to consider include average sales cycles, terms of payment, anticipated bad debt, salaries schedule and a whole host of other elements, like taxes.
For me the golden rule when starting a business is simple; unless you are financially strong yourself, spend the time and find a really strong resource to assist with this critical function.
You may argue and, sometimes, your entrepreneurial spirit may overrule the resource (as is your right) but not without healthy debate and you being well-aware of the risks attached to your decisions.
That’s worth its weight in gold.
Monitor your results
Nice to have a budget but actual results and operations should now be compared to those guestimate numbers. Frequent analysis (once a month or more) is needed to see how the actual cash flow situation measures up.
This will allow you to work out some glitches in your matrix in quickly address hiccups before they become serious problems.
Understanding why you are performing better, or worse, than expected is of equal importance and will allow you make corrections to your budget, or your business plan – or both if need be.
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What is your plan B, C – and beyond?
Like the (now infamous) rugby game between the Springboks and Japan, you can have the most meticulous planning, the most experienced resources, be absolutely prepared for the big fight to business success – only for some young upstart (or other circumstances) to completely ruin your day.
When things go pear-shaped you need to have contingency plans in place to secure cash-flow.
This includes having pre-arranged agreement for credit with your bank. It is important to ensure that this arrangement is made in good time because your bank (like most others) will be cautious to extend credit to a business that is in distress already.
Cover your bases when the sun shines so you have no issues (or less issues at least) when clouds gather.
Spend the time and make sure that you are well-prepared – then set about getting your business back on track without the added stress of making next month’s payroll.
Control the timing of in-coming funds
If you are in the business of extending credit lines to clients you need to be very mindful of the impact this can have on your own cash-flow. It’s most certainly worth your while to incentivise clients for early payment, e.g. 10% discount or additional value-added services, for example.
In addition you need to ensure that your accounts department bills clients in a timeous fashion. Only sending invoices a few days before they are due is a recipe for disaster as your clients would have their own internal process, meaning you could miss allocated “pay days” and would then have to wait until their next scheduled run.
Make sure your house is 100% in order (in terms of accuracy and timing) and then set about making early account settlement an attractive prospect for your customers.
Better manage the way YOU pay
While you make the maximum effort to get cash in, the way you manage your cash-outflow is of equal importance and should clever negotiations around payment terms, discounts and the like allow your cash to work hard for you.
If there is no incentive to do so, early payment of accounts should be avoided.
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Should cash be tight it’s advisable that you first ensure payroll is covered (as you certainly do not want to lose key employees or affect production in any way), then look to pay your most important suppliers while, lastly, making sufficient arrangements with smaller creditors.
Remember that a good credit record largely depends on how diligently you pay your bills. And this will be vital to you, and your business, as you forge ahead into futures unknown.
In the end good management of your cash flow requires logic, reason, process and consistent investment in time, knowledge and data analysis.
Anything less and you will be staring down the barrel – with another of your brilliant ideas at risk.