All the answers to your unique business lifestage questions
Managing your cash cycle is one of the most important aspects of your role as a business owner.
According to Clive Pintusewitz, head of small enterprises at Standard Bank, good cash flow management allows you to know exactly what’s happening in your business, which in turn lets you improve the business and set new targets.
“The core idea is to improve how quickly you turn materials into products, inventory into receivables, and finally receivables into cash,” says Pintusewitz.
There are a number of ways you can achieve this:
- Issue invoices promptly and efficiently (eg use email instead of the post office).
- Get your invoices out as soon as possible. Incentivise your accounts department and have weekly meetings to track the progress of collections. This will help you notice and follow up on slow payments as well.
- Identify slow-paying customers by tracking accounts receivables. Make a policy of cash on delivery for these customers, or incentivise quicker payments.
- Reduce the number of credit days allowed to customers (but don’t negatively affect your sales. If you can afford to assist your clients, you should do so – it will engender loyalty).
- Actively follow up with customers. Make it as simple for customers to pay you as possible, and then actively follow up with them so that you’re always top of mind.
- Use discounts and rewards to incentivise customers to pay early.
- Ask for deposits when orders are made.
- Do credit checks on all new customers, or ask them to pay cash upfront.
- Pay attention to old, outdated inventory; Get rid of it for whatever you can get.
Top three cash mistakes to avoid
Once you’ve got a cash management system in place that lets you know exactly what’s coming into your business, and what’s going out, look out for these top three cash management mistakes that business owners often make.
1. Large purchases without considering the cash impact
Always evaluate how the equipment will depreciate over time, and if your cash reserves can handle the purchase.
“Many business owners only look at the growth potential of a purchase, without considering if the increased revenue will cover the costs of the purchase,” says Pintusewitz. “If the purchase will put a serious dent in your reserves, you should perhaps consider a short-term loan. Ensure that the expense is worth the increased revenue, and then be aware of the interest rates and evaluate your best options.”
2. Don’t confuse cash flow with profits
“If you’re showing a profit on paper, but don’t seem to have any cash left at the end of the month, you could be spending money faster than you’re making it,” warns Pintusewitz.
“Slow down your spending on new products, equipment and growth and focus instead on getting your invoices paid.” You should also always track what you’re spending versus what you are selling – and keep an eye on your cash in the bank.
3. Sales aren’t revenue until you’ve invoiced (and have been paid)
You should never count deposits as income. “Depending on what you do, it could take months before the service is rendered or the equipment is delivered,” says Pintusewitz. “A lot can happen in that time. If you post great sales this month, when the revenue will only come in later, you can give your business a false sense of profitably – and incorrectly predict cash flow.”