In today’s episode, John talks about controlling your cash flow. There are businesses with borderline profitability but great cash flow and they actually succeed far better than those the other way around.

WHAT IS CASH FLOW?

Cash flow is the money kept in the cash register or bank account. The money you use to pay bills, wages, taxes and other expenses. How you manage this cash is critical to the success of your business.

CASH FLOW VS PROFIT

Now something that’s important to remember is not the same as profit. Cash flow is concerned with matching cash coming in with cash going out. In accounting, profit is income minus expenses. It is very important to master this difference to understand what cash flow is all about.

IMPROVE YOUR CASH FLOW

1. Draw up a cash flow forecast and discuss this with your accountant, finance broker, bank manager, to see if a plan can be worked out to improve your cash flow. To help you with this, use an annual cash flow forecast fact sheet which you can get from us by having a look at our website and contacting as through there at www.moreprofitlesstime.com.

2. Review all of your business expenses, and see if there is a possibility of reducing this cause temporarily

3. Check your prices. Make sure you are charging correctly. If necessary, recost it so that there’s a proper margin that you’ve put on your cost of every particular product.

4. Minimize your stock holding. Carry out an immediate stock take including raw materials and packaging, and identify which stock is really sellable and which is out of date.

5. Review your immediate sales program to decide your real sales potential. Within the next month, three months, or six months.

6. Get cash first and give credit last. Don’t extend credit to anyone unless absolutely necessary. A cash business is ideal even if you have to give a discount — and I hate saying that — to get money in the till.

7.  Get your invoices out quickly so that your debtors can pay them by the due date. Make sure that this side if the business is super-efficient.

8. Prepare a list of your debtors that is people who you owe money to. That is people who you owe money to and carry out urgent action to collect.

“It’s better to lose a business of a bad debtor, than continually spend time and resources chasing money that’s owed to you.”

9. Prepare a list of your creditors that is firms to who you owe money and make arrangement if possible to get extended credit on money you owe. Instead of getting 30-day terms, see if it can be extended to 45, 60 or even 90 days.

10. Investigate leasing assets instead of buying them. Even though leasing may cost you a little bit in interest, it can improve your cash flow significantly and allow you to put that cash to better use.

11. List any assets such as plant and equipment that’s not in use and can perhaps be sold for cash.

12. Check your personal overdraft accommodation. If you’re over the limit, talk to your bank to see what can be done about it.

13. Do not over commit as far as loans are concerned because servicing a loan can greatly affect your cash flow situation.

14. Make sure you plan well ahead of any capital expenditure because this outlay will not bring in any quick cash return.

15. Always carry a cash reserve under which you will not make any more payments until the liquidity situation is improved.

Remember: improve your cash flow, improve your profitability, improve your business.

THANKS FOR LISTENING!

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Until next time!

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TRANSCRIPT: PODCAST EPISODE 9
Title: Controlling Your Cash Flow
Date Published: August 26, 2015
Running Time: 03:42 minutes

Hey Business Rock stars!  This is John Millar, the Naked Business Coach, bringing you the latest episode in our fantastic podcasting range. Today, I’m going to talk to you about controlling your cash flow. Now I have seen a lot of businesses over the years that have borderline profitability but great cash flow and they actually succeed far better than those the other way around.

So what is cash flow? Cash flow is the money kept in the cash register or bank account. The money you use to pay bills, wages, taxes and other expenses. How you manage this cash is critical to the success of your business. A business needs cash to keep going just as a car needs petrol or fuel. Efficient cash flow management can enable you to fuel the business with sufficient liquidity to keep it running smoothly so that you get the most mileage out of every single dollar.

So this involves knowing where your cash is coming from, knowing where your cash is being spent, ensuring that your cash is being properly accounted for and safeguarded. Estimating what your future cash requirements will be, planning to have your cash ready when you need it.

Now something that’s important to remember is that it’s not the same as profit. Cash flow is concerned with matching cash coming in with cash going out. In accounting, profit is income minus expenses. It is very important to master this difference to understand what cash flow is all about.

So controlling your cash flow. Sooner or later, most businesses come across the problems of cash. That is having to fins some money quickly. While a business may be profitable, it can never the less fail, simply because it cannot find the ready cash to pay its bills when it’s due. For example, you may be expanding quickly, have hired additional staff, and you need to pay them but you haven’t yet received enough cash to pay the wages. Or you find that unless you can pay your suppliers account by the end of the month, they’re going to stop supplying you and bring your production to a halt. Now, desperate last minute appeals for cash and credit seldom work. They don’t’ usually result in a positive response nor do they solve the basic problems which caused the cash shortages. Turning up in a bank to seek relief for an unexpected shortage of cash is hardly the way to give the bank confidence in your managerial ability for your business. So here’s some suggestions to help you improve your cash flow.

First, draw up a cash flow forecast and discuss this with your accountant, finance broker, bank manager, to see if a plan can be worked out to improve your cash flow. To help you with this, use an annual cash flow forecast fact sheet which you can get from us by having a look at our website and contacting as through there at www.moreprofitlesstime.com.

The next thing to do is to review all of your business expenses, and see if there is a possibility of reducing this cause temporarily. For example, look at vehicle use, mobile phone cost, stationary, contractors, and every area that you’re spending money.

Thirdly, check your prices. Make sure you are charging correctly. If necessary, recost it so that there’s a proper margin that you’ve put on your cost of every particular product. Some businesses record every increase in sales figures and yet their cash situation ins critical from month to month. It’s possible that there’s just not enough profit built into these products and the sales are only covering the cost of getting that product or service out.

Next, minimize your stock holding. Carry out an immediate stock take including raw materials and packaging, and identify which stock is really sellable and which is out of date. The more stock you have siting around, the more cash is being lost because the stock could have been converted into cash. You need a certain level stock to satisfy clients and also ensure that you generate good sales. However, only hold sufficient stock to keep the business and the clients happy.

Next, review your immediate sales program to decide your real sales potential. Within the next month, three months, or six months.

Next, get cash first and give credit last. Don’t extend credit to anyone unless absolutely necessary. A cash business is ideal even if you have to give a discount — and I hate saying that — to get money in the till.

Next, get your invoices out quickly so that your debtors can pay them by the due date. Make sure that this side if the business is super-efficient. If you’ve made the sales, and they need to be charged and invoiced out then this is the side of the business that is obviously very important. These are minor matters but it’s the small thing s in business that can cause the biggest problems.

Next, prepare a list of your debtors that is people who you owe money to. That is people who you owe money to and carry out urgent action to collect. If payment is still not forthcoming, then follow it up with a demand in writing. If payment is still not made, consider the services of debt collectors if debtors do not respond to your reminders. The fact that this could affect their credit rating usually moves good debtors to pay to maintain their good business name. It’s better to lose a business of a bad debtor, than continually spend time and resources chasing money that’s owed to you.

Next, prepare a list of your creditors that is firms to who you owe money and make arrangement if possible to get extended credit on money you owe. Instead of getting 30-day terms, see if it can be extended to 45, 60 or even 90 days. Remember, this is interest free money, and having the extra time gives you the ability to collect all of your money before you have to pay your bills. Now, if you have been solid with paying your bills in full and on time before, most people that you owe money to will be quite helpful. If you haven’t been, that could cause a problem.

Next, investigate leasing assets instead of buying them. Instead of paying cash for vehicles or equipment, look at leasing them. Even though leasing may cost you a little bit in interest, it can improve your cash flow significantly and allow you to put that cash to better use.

Next, list any assets such as plant and equipment that’s not in use and can perhaps be sold for cash.

Next, check your personal overdraft accommodation. If you’re over the limit, talk to your bank to see what can be done about it.

Next, do not overcommit as far as loans are concerned because servicing a loan can greatly affect your cash flow situation. This is why before taking out a loan, you need to sit down and very carefully consider it your accountant, your bookkeeper and your business coach before you look at applying for that money. And then the three of you should sit down with your finance broker or bank manager so that together you can work out the best possible opportunity.

Next, make sure you plan well ahead of any capital expenditure because this outlay will not bring in any quick cash return. Last but most certainly not least, always carry a cash reserve under which you will not make any more payments until the liquidity situation is improved. This applies mainly to your working capital of requirements or in other words fixed cost. I usually recommend to my clients that they carry at least 90 days’ worth of fixed costs. They’re the cost you’re going to have whether you sell something or not within your business. If you got 90 days sitting there in reserve, you can be gaining interest on it and then you’ve got a safety net for when or if something does go a little astray.

This has been John Millar, the Naked Business Coach, stripping business back to the bare basics. I hope you got a little bit out of this. And remember improve your cash flow, improve your profitability, improve your business.

Take care!

John Millar

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