The Importance of Cash Flow
Having a cash shortage can be very stressful. A lack of cash can make it difficult to meet your businesses financial obligations, such as loan repayments, paying creditors and payroll. 82% of businesses fail due to poor cashflow, and out of these, 70% were profitable.
How does a profitable business run out of cash?
It's simple - in business you don’t spend profits, you spend money/cash. If all of your cash is tied up in assets or debtors it isn’t available to make payments on loans or to creditors.
It’s important to have a cashflow projection, as this will allow you to identify times when cash will be tight and put in place a plan to get through them or make allowances for these times in month of plenty. You can identify the affordability of new equipment, identify areas for improvement and can be used for finance approval.
3 ways to improve your cashflow:
Reduce Debtor Days
For every day that an invoice remains unpaid, that is another day that your business is out of pocket for the labour and materials that went into providing your service or product. Some ways of reducing your debtor days include:
Reduce Stock on Hand
Each piece of inventory has a dollar value and each piece that is sitting on a shelf equates to a dollar amount that is not available in cash to be earning interest, making repayments or paying your businesses expenses.
You may be able to reduce your stock on hand by finding a supplier with low or no delivery cost and ordering stock as needed or in low volume without addition expense.
By reducing the range of products offered you can cut back on the amount of inventory held. A restaurant may chose to select a target market and reduce their wine list selection, switching their focus to quality wines from select regions.
Providing the customer has quality choices the limited range may not be a factor.
At times it can be cost effective to purchase inventory in large volumes to receive discounts from the supplier. However this is only cost effective if you are purchasing large quantities of a product that is popular with your customers. If you purchase large quantities of a product you only sell occasionally, even if the product is bought for a good price, it is cash that is sitting in a store room unable to be used.
Consolidate Loans
By consolidating debts it can reduce the number of payments monthly making it easier to budget for and track. If you are consolidating short term loans, credit card and other forms of credit you can get a reduced interest rate which may reduce the amount of each repayment.
Remember – cash is the oxygen of a business. If a business is unable to pay its bills when required, it might be unable to operate or close its doors – even if profits are being made.
How does a profitable business run out of cash?
It's simple - in business you don’t spend profits, you spend money/cash. If all of your cash is tied up in assets or debtors it isn’t available to make payments on loans or to creditors.
It’s important to have a cashflow projection, as this will allow you to identify times when cash will be tight and put in place a plan to get through them or make allowances for these times in month of plenty. You can identify the affordability of new equipment, identify areas for improvement and can be used for finance approval.
3 ways to improve your cashflow:
Reduce Debtor Days
For every day that an invoice remains unpaid, that is another day that your business is out of pocket for the labour and materials that went into providing your service or product. Some ways of reducing your debtor days include:
- Provide an estimate of the price before starting work.
- Implement payment terms if they aren’t already in place and communicate these terms upfront. You can include these in the initial quote for service or product.
- Provide the invoice with finished product.
- Include multiple payment options – Cheque, Credit Card, Direct Credit
- Enforce your payment terms this may mean employing or assigning a staff member to champion the debtor process.
- Offer incentives for prepayment. PJT offers a 2.5% discount for clients who pay at the time of accepting the quote.
Reduce Stock on Hand
Each piece of inventory has a dollar value and each piece that is sitting on a shelf equates to a dollar amount that is not available in cash to be earning interest, making repayments or paying your businesses expenses.
You may be able to reduce your stock on hand by finding a supplier with low or no delivery cost and ordering stock as needed or in low volume without addition expense.
By reducing the range of products offered you can cut back on the amount of inventory held. A restaurant may chose to select a target market and reduce their wine list selection, switching their focus to quality wines from select regions.
Providing the customer has quality choices the limited range may not be a factor.
At times it can be cost effective to purchase inventory in large volumes to receive discounts from the supplier. However this is only cost effective if you are purchasing large quantities of a product that is popular with your customers. If you purchase large quantities of a product you only sell occasionally, even if the product is bought for a good price, it is cash that is sitting in a store room unable to be used.
Consolidate Loans
By consolidating debts it can reduce the number of payments monthly making it easier to budget for and track. If you are consolidating short term loans, credit card and other forms of credit you can get a reduced interest rate which may reduce the amount of each repayment.
Remember – cash is the oxygen of a business. If a business is unable to pay its bills when required, it might be unable to operate or close its doors – even if profits are being made.
