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Poor cash flow management is a business’ death sentence

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One of the greatest business lessons I learnt along my journey of talking to the best in business and actually growing my own was that a business can go for a long time without making a profit. However, you try keeping a business alive with a negative cash flow.

A cash crisis is the number one business killer and, like cancer, it is an insidious ailment that creeps up on a business until it becomes mission critical.

And a bit like good health to ward off a cash crunch, the ultimate panacea is to make your total business practices as good as they can be.

By the way, the better a business is at cash flow management, the less need there could be for external financing. That is, smart cash practices actually facilitate internal financing, which means less dependence on banks, which has to be a good thing.

All too often business owners think cash flow is about cost cutting, and that is important, but it’s more than this. It includes marketing to the max to bolster business revenue, becoming an expert at debt collection, training staff to be cost-conscious and being willing to learn from experts who can ensure better cash flow.

I have come across wise business owners who have shared cost savings found by staff, while others reward non-sales staff who introduce new customers to the business. This clearly demonstrates how better business practices result in better cash outcomes.

X-ray your business

The starting point for all businesses is to do a cash flow projection. This can be likened to an x-ray of the critical structure of a business. When a cash flow projection is complete, it’s like looking at the ‘skeleton’ inside a business and will determine whether the business stands or falls. It shows where you can find money and where it will be spent.

But wait, there’s more. A cash flow projection shows when money has to be spent or can be collected at odd times such as over the Christmas holidays when loadings are paid and debtors forget to pay. And then there’s tax time, which can be a strain or a windfall.

The goal is to be ready for cash contingencies and your business will be the winner if you become a master at cash management.

Maintaining business health

Here are some lessons from the professionals, which could give you a cash competitive edge:

  • See if you can GST most of your costs by saving 10 per cent.
  • Make sure you have the cheapest loans and you get the maximum interest on your cash balances.
  • Get alternative costings from other service providers.
  • Ask your accountant to run the rule over your costs.
  • Establish a clear credit and payments policy with customers.
  • Make it easy for customers to pay quickly such as with a credit card and through direct debit.
  • Pay slowly but collect quickly.
  • Have a script to prompt slow payers and take notes of all contact so they can be used for follow up phone calls.
  • Ask for deposits for long projects where there is work-in-progress.
  • Make sure you have the right overdraft – a too small one in a fast growing business can be a big mistake.
  • Make sure you price for profit and be careful about discounting. A 10 per cent discount results in a much bigger drop in percentage profit.
  • Sell equipment not being used.
  • Manage your stock so there’s not too much money locked up in slow moving products.

There are other techniques to become a professional money manager. Some businesses appoint a financial controller while others go for outside contractors or get their accountants more involved.

All of these are better than doing nothing as ignoring how poor you are at cash management could put your business on death row.

So, if you’re looking to work on your business rather than being stuck in it, book in for a complimentary business assessment today with Switzer Business Coaching

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

 

Published on: Thursday, June 24, 2010

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