Let’s talk money!
Have you ever heard it being said “if you can’t manage R1000, you won’t manage R100 000”?
Yup, that’s it! Managing your cash flow is basically tracking how much money is coming into, and out of your business. However, profit does not equal to cashflow. Cash flow is one of the most important components that makes the business successful, like many say…it is the blood that keeps the heart of the kingdom pumping!
Businesses that have more cash going out more than it comes in completely die or get into debt they could have avoided.
Back to Basics.
You should be tracking your cash flow either weekly, monthly or quarterly. There are essentially two kinds of cash flows:
1️⃣Positive cash flow: when money coming into the business through sales for instance, is bigger than the money leaving business by means of salaries, expenses, etc.
2️⃣Negative cash flow: when money leaving the business account is greater than the money coming in. This screams TROUBLE for the business.
Simple example: company x renders your services in May, and you invoice them on the 31st of May. Company x only monetise the invoice in around June-July, whilst you had salaries to pay. Thus cash outflow exceeded cash inflow in May. If many other customers continue to do this, you can almost see how your company could run into cash flow issues.
The cash flow statement basically records all of the organization’s cash inflows and outflows, and includes cash from operating activities. The cash flow statement is divided into three parts: investing, financing, and operating activities. Failure to manage this cash can lead to problems.
We have mentioned the poor cash management may lead to cashflow problems or bankruptcy, but here are some of the causes:
1️⃣Poor understanding of the cash flow cycle – not having a clear understanding/ timing of cash inflows and outflows from the business. E.g. when to pay for accounts payable (what you owe to suppliers),etc.
2️⃣ Lack of understanding of profit versus cash – a business can be generating profits on its income statement and be burning cash on the cash flow statement.
3️⃣ Lack of cash management skills – it is important to acquire the necessary skills to manage your finance. If you are looking for this service, do get in touch with us!
As they would say, successful financial management involves balancing 3️⃣ elements:
accounts receivable (what you are owed by the customer), accounts payable (what you owe to suppliers), and shortfalls (the amount of money you owe that exceeds your available funds). Make sure one element doesn’t overtake the others.
If you can’t afford to pay someone to do this for you, you can do it by yourself. Here are 7️⃣ tips to manage cashflow:
1️⃣Have an emergency fund
2️⃣Encourage early payment from clients
3️⃣Put cashflow over profit
4️⃣Assign someone to monitor your cashflow
5️⃣Drive and/ or boost sales
6️⃣Reduce expenses where possible
7️⃣Finance purchase orders