Cash Is King - Here's Why
Posted on 29th April 2021
Many people think that business is all about profitability, so the statement ‘cash is King’ might seem a little bit strange.
In fact, your profits are only part of the story. Understanding how money flows in and out of your business will be essential for its overall health. If you don’t, you could be playing a game of chance.
In the Charles Dickens book ‘David Copperfield’ Mr Micawber, famous for being sure that ‘something will turn up’, says: “Annual income twenty pounds, annual expenditure nineteen, nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”
This is the Micawber Principle, and it’s all about cash flow.
Controlling your cash flow
For many small businesses cash flow is difficult to control, especially during periods of growth. However, understanding where and when money comes into the business and when payments must be made will make all the difference.
There are some really useful ways to forecast your cash flow and predict when your cash resources will come under pressure.
Why is this important?
You will know that you have enough cash in hand to fund business investments in equipment, property and people. This means you can avoid unnecessary borrowing and minimise outgoings on interest payments.
You will also know in advance if your established business credit is about to be exhausted so that you can speak to your bank in advance.
Or you can make better business decisions. For example, while a large new contract could be tempting you might need to buy equipment and material before you are paid, putting your business under financial pressure. If your new customer won’t agree to an advance payment you might reconsider the benefits of taking on the work.
When you anticipate more money flowing out of your business than will be coming into it you have negative cashflow. You have four main options to manage the situation. You can:
increase profits, possibly by increasing your prices or reducing your overheadsdecrease your stock holdings by selling any excess and ordering more carefully
make sure all your invoices are paid on time
increase your credit options
Even a signed contract isn’t necessarily ‘as good as money in the bank’. For large contracts it is worth checking payment terms, your customer’s financial status, and their reputation for paying suppliers on time.
Check if your customers have a cut-off date for their monthly payment run because you could find yourself waiting almost 60 days for payment if you miss the deadline. Even if your customers’ normal payment terms are 30 days, you can still negotiate with them to agree 21 or 14 days instead.
Make sure you agree the price you will charge in advance so there aren’t delays to payment while customers query their invoices. It’s a good idea to check who will approve the payment, because it might not be the person who has placed the order. Then you will know who to contact if there is any delay.
Invoice as soon as work is complete, or delivery is made. Wherever possible take a deposit in advance to minimise your risk.
Make sure you regularly review your payments and follow-up any that are overdue. Ideally use accounting software that will link to your business bank account online so you can see payments immediately.
If you need to chase a payment make a phone call rather than sending an email because you are more likely to receive a prompt response.
Stock control is important too, especially if some of your stock has a limited shelf life. Keep orders to a minimum for anything that is likely to stay on your shelves for a while and consider sales or special offers for any long-standing stock items.
Also consider negotiating with your suppliers to extend your payment terms to give yourself more flexibility. As a regular customer you might be able to extend your terms from seven days to 21days because your suppliers know you will pay on time.
If you would like to know more about managing your cashflow to improve your business performance, please get in touch.
Tagged as: Cashflow
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