Every Business Needs A Simple Way To Manage Their Cash Flow
We have all heard the statistics that 9 out of 10 businesses fail due to poor cash flow. Cash flow is the life blood of a business and without it the business will die. If it is that critical why don’t most businesses manage their cash flow like they do other operations in the business like marketing or purchasing. The most likely reason is that they don’t have a simple system to manage the cash flow without needing the help of their accountant.
If you don’t measure it, you don’t manage it
You can’t manage something if you aren’t measuring it. Many businesses I have come across don’t believe they have a cash flow problem. However, they are regularly putting their own money into the business, have an overdue tax bill or are paying themselves less than an appropriate salary for their role in the business. This happens because they are not measuring their cash flow. If you aren’t measuring your cash flow then you can’t manage the activities that are having the biggest impact on your cash flow. When businesses aren’t measuring their cash flow they are making decisions based on how much money is in their bank account rather than on cash flow, profitability or future payments.
How to measure Cash Flow
There are two possible reasons for poor cash flow: strength and speed.
Strength is how much of the sale actually makes it to the bank after all payments are made. Most importantly your business must be profitable. If it isn’t profitable this is the first thing you must work on. If you’re profitable but struggling to pay your bills then you need to find out what other payments are affecting your cash flow. These could be payments such as tax payments, loan repayments, director’s loans/owner’s drawings or asset purchases.
Speed is the time it takes from purchasing stock or providing a service till the money is in the bank. Speed is affected by activities such as stock purchasing, marketing, debtor collection and invoicing.
It’s important to have simple measures set up for both strength and speed of cash flow. This will help you focus on the right activities that will increase your bank balance. If speed is an issue then focusing on strength activities will not have the same impact or could possibly make things worse. Similarly, if strength is the source of your problem then it won’t matter how much you speed up your processes.
Setting up your system
Building a system to monitor your cash flow must be simple, fast and easy to understand to ensure quality decisions are made.
Your system should be set up so you can understand it. It doesn’t need to follow accounting standards. Make it as simple or complex as you like. Ensure you don’t have too much information and are suffering from analysis paralysis.
It should not take a long time to collect the information. You need up to date information that isn’t using a lot of resources and time to collect.
Split your measures into speed and strength. Focus on two or three measures that you want to improve. Set targets for these activities and review regularly.
Lastly, once targets are met reward the people who helped achieve the increase in cash.