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Cashflow is King

Thursday, November 5, 2020 · 0 Comments

 

It does not matter how much business  you generate, or how many tenders you  submit, or even how busy you are, if no  cash rolls in, your business will struggle to  survive. Monitoring cashflow should be the  primary focuses of business owners, yet so  few actually do this because they are busy  working in the business. A weekly glance  at the bank balance generally substitutes  for proper cashflow forecasting.  

Think of cashflow as the lifeblood of your  business. Without it, your business will  quickly wither away and die. It is as simple  as that. Having a bucket load of cash  owing to the business because you have  done a heap of work and issued invoices  galore is of no use, as the cash is not  sitting in your account. In fact, without that  proper cashflow management, all the extra  work may be detrimental to your cash  position. 

Getting more cash into your business is  simple if you know what affects it and  how to change that effect. There are the  obvious things like create more revenue  and reduce expenses that directly affect  cashflow. But more significantly collecting  receivables and controlling stock/work-in progress whilst keeping payables within  terms has a greater impact on cashflow.  Your capacity to manage and monitor  

these Balance Sheet items, will determine  your long term business success. Small 1  day or 1 percent improvements in these  vital statistics will make a significant cash  improvement to your business. 

Your accountant should be providing you  with the tools and knowhow of cashflow  forecasting. If cash is king and the  lifeblood of your business, what good are  financial reports and a tax bill nine months  after the end of financial year to predicting  forward cashflows? The most important  aspect of all successful businesses is  their capacity to manage cashflow via the  Balance Sheet as described above. This  applies to large mining companies, big  retailers, and mum and dad businesses  everywhere. 

I recently had a conversation with two  clients who were on different sides of  business transactions with a large timber  company. One did work for the entity, and  the other bought goods from it. In the  conversation it emerged that the business  that was owed money by the large entity  was paid 60 days after invoice, however the  business that owed the entity money was  made to pay within 14 days of invoice. This  is an example of best practice cashflow  management – collect your receivables and  negotiate better terms for payables.

 

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