The origin of the expression “Cash is King” is unknown, however it’s validity within the business world has never been opposed. Cash is essential for a business, if you’re not making money; you’re not really running a business.
You need an accounting system in place that helps you keep track of money in, money out. It’s that simple. Using these standards, ensure that you have reliable accounting information on which you can base important financial decisions (also necessary for potential investors and creditors). If you don’t have a system in place, you’re just flying blind. Work closely with a trusted financial partner or accountant and dig deep into your books to avoid cash flow mistakes.
Once you have an accounting system in place, you’re on the right road, but, now you need to track and analyze the numbers to understand and improve your cash flow. Just because you’re turnover is good, doesn’t mean you’re profitable. You need to keep a close eye on costs vs turnover —including future costs such as taxes. If there’s still money left over after your calculations, then and only then, are you making a profit. Also use the numbers to identify where the profits are coming from (i.e. is one product more profitable than others) and make business decisions based on your findings.
For many business owner this task may not be their first priority, but getting it right is crucial to ensuring healthy cash flow. When you are in the early days of starting up your business, there’s a never-ending list of tasks to complete. Sorting out the terms and conditions of trade is not always at the top of the list. Getting your product market ready, finding customers and marketing your product often take priority in the startup process.
You need to establish payment terms between you and your supplier or between you and your customer, neglecting this less exciting part of your business, could impact your cash flow through delayed payments and having to pay for materials before receiving payments.
The invoice may have been sent, but has the payment been received? Customers are notorious for stretching credit terms, which means that the money you were including in your calculations may not have been received. It’s important to have a system in place to collect payments in a timely fashion, as per the agreed terms. Your accounts receivable need to be in line with your accounts payable.
Operating your business without a budget is like starting a business without a business plan. You need to know where you’re going and how much you can afford to spend on this journey, if you want to build a profitable business. Unfortunately for those entrepreneurs who aren’t “number people” a budget is never one and done. You’ll need to create a new budget at least annually.
Many businesses wind up spending money unnecessarily. One of the biggest unnecessary expenses is staffing costs. Business owner often miscalculate their personnel costs: who you need, what you need to pay them, and how long (and how much it will cost) to source them. Before going through the expensive process of sourcing, recruiting, and hiring an employee, look into outsourcing, especially for non-core functions such as HR, accounting, and legal.
Keep a close eyes on your bills, just as you would hope (and expect) your customers to make payments in a timely fashion, you need to do likewise. Make sure that you have a system in place to ensure that you give the money going out at least as much attention as the money coming in.
Pricing is an art, a challenging art. Do your due diligence to perform competitive analysis. It’s not realistic to think that you can charge much less than your competition, unless you are guaranteed a much higher volume of sales—a nearly impossible guarantee for most startups.
Raising your prices – if you have not already done so, it might be time to raise your fees but not quietly. Make sure you announce to your past and current customers that your prices will be increased as of a specific date and why you are increasing them. You can then give them an opportunity to stock up or renew their contracts.
Managing the day-to-day accounts is important, but you also need financial reports for insight into the big picture, that is, the real-time and projected status of your profitability.
The first step towards improving your cash flow is to get an overview of your businesses current financial status. Sage 50 Accounts can help you track and improve your cash flow.