Cashflow is at the heart of every successful business yet effective cashflow management is one of the biggest failings of many entrepreneurs with poor cashflow management being a leading cause of SME business failures today.
Businesses need to be profitable to survive but first, you must ensure that your sales are sufficient to cover all of your business costs. For this, you need to determine your breakeven point. Once you have established this figure, this becomes your minimum revenue target and it should be reviewed and adjusted regularly throughout the life of the business.
To optimise cashflow management you need to understand that cashflow and profit are not the same. Profit is your total revenue earnt minus expenses and tax, whereas cashflow is the actual cash money available to run the business.
While it is possible to tally customer invoices as revenue and then deduct all expenses to arrive at your earnings for a set time period, this total only represents a profit when the entire invoiced amount is realised as cash.
It is also important to have a cash reserve that is sufficient enough to keep your business afloat through the early months. Continue to build a cash reserve by regularly setting aside a percentage of profits until you have built up a reserve that will cover your expenses during downtimes, unforeseen supply problems or any external factor outside of your control.
Best practice cashflow management
Pay attention to detail when it comes to managing cashflow. Three key principles of best practice cashflow management are to keep abreast of your accounts receivable and accounts payable, know where the shortfalls are, and the steps needed to quickly fix them.
1. Accounts receivable
Be persistent and consistent with invoicing, provide due dates and establish late fees. Invoice quickly, because any delays in invoicing your clients will only add to the time you wait to receive payment.
SMEs should invoice customers as soon as the work has been completed and where possible, collect payment at the time of sale. Provide an incentive for customers to pay at the point of sale, such as a discount for immediate payment.
If you are offering finance plans, they must be set up as a contract and strictly enforced. Pre-approve your customers for credit before you assign it and limit your payment terms to 7-days if you can, otherwise, these should not exceed 30-days.
2. Accounts payable
Negotiate favourable terms to extend your payables as long as possible. Try to obtain credit on 60-day terms with agreements based on cash prices to enable you to spread out payments without incurring any interest.
Focus on customer acquisition and look for ways of acquiring new customers at a low cost by optimising every sales and marketing channel available to you. Boost sales figures through cross-selling and up-selling to your existing client base. If you can achieve this while minimising your accounts receivables, you are on track to improve your cashflow.
3. Managing shortfalls
Understand where any shortfalls in cashflow may occur. Monitor key cashflow data or variables to enable better, more accurate and up to date cashflow projections.
Prepare a thorough, accurate cashflow forecast for a given period, keeping in mind historical data, including customer payment histories, averages, trends and current economic conditions. Project monthly cash inflows and outflows during the period and compare and update your budget based on actual performance.
Keep the focus on cashflow management because expenses change, a supplier might raise his prices, or you could hire additional staff. If current cashflow doesn’t cover these additional expenses, you could be placing your business at risk.
Grow your business carefully, you will need to spend more to sell more, for example, buying more raw materials, inventory stock or hiring more staff. If the period between the increased cash outlay and increased sales is too long, you could be putting a huge strain on the businesses cashflow.
Identify financial risks and have a business growth plan in place, one that pays close attention to your cashflow management and that avoids long delays between outflows and inflows of cash.
Make use of technology for cashflow management
Utilising the right accounting tools and technology is a must for cashflow management and there are many cloud-based applications available to help improve your cashflow management. With built-in real-time dashboards, analytics and reporting functionality, you can optimise your inventory management software