Good Cash Flow Management

Managing the cash flow of your business is very important for business survival.

If your bank balance is always on the low side, it means that your cash is flowing out faster than they are flowing in. You need to look into the possible causes of this happening :

1. Are you paying your supplier earlier than you collect from your customer?
2. Are you holding too much slow-moving stocks
3. Are you fully optimising the resources - staff, office space, office location?

To avoid a cashflow crunch from happening to your business, here are some PROACTIVE steps you can take:

1. Collect your accounts receivable. Yes, this may look silly on paper, but I have come across business owners who are too busy going round trying to to get more customers and more sales, not realising that the cash is in the receivables.

You must track what is owing by your customers and don't allow the invoices to go unpaid beyond the agreed credit period. Once the invoice goes 'stale', there is a probability of that debtor-company going out of business, and you will never be paid for the services or product sold.

Remind the customers of what they owe you, by printing the words 'Pay in 30 days' or 'Due upon receipt' on the invoices you send. And follow up closely by phone, fax, or email, when the invoices are due for payment.

2. Collect money upfront. Collecting some money upfront will secure the sale. I practice 50% payment upon confirmation of order, and full payment before commencement of services rendered. Some customers may object, and ask for varying terms of payment. But if you remain firm, and explain the rationale for it, your customer will comply with your terms. My rationale is that I want to concentrate on delivering quality service without having to worry about administrative matters.

Once my prospective customer said that his company's standard operating procedure is to pay suppliers only after 30 days. I replied by saying that it's my company policy to collect upfront and we don't make any exception, whether the customer is big or small. The customer relented, and we waited for 3 days for the cheque to be prepared before we deliver the product.


3. Negotiate with the suppliers. Ask for longer credit period to settle the amounts due. We once negotiated with one supplier to pay our debts in proportion to the sales of that product. This was the time when we mis-read the market condition and ordered stocks way beyond the demand. The alternative is to return the stocks which the supplier was not in favour of.

4. Sell your inventory! Have a closed door sale and offer great discounts to your existing customers, to liquidate the stocks and convert to cash.

5. Cut fixed costs. Sit down and find out areas where you can reduce costs as this will generate extra cash for the business. Areas to look into are telephone bills, and rental agreements.

6. Take drastic action . Look into the viability of moving your business to a smaller office where the operating costs are much lower. However you need to work out the moving-out costs (rental deposits, renovation cost) versus the staying-put costs, and the cash savings from the relocation.

If the credit squeeze prolongs, the business (and the owner) may face one of the following consequences :
1. Company lose out on business opportunities
2. Suppliers will harass you for payments, and may impose cash terms for new orders.
3. You feel stressed out, and this may affect your health, and your ability to think and strategise.
4. Your staff will lose confidence in the company's ability to continue as a going concern, and may leave you
5. Eventual closing down of business


Just remember, profit is merely a book entry. Cash is king. Take time to understand the cash flow cycle (sale-debtor-cash-stock-sale). Managing your cashflow is made easier if you have an accounting software, like MYOB Accounting, to assist you.