Often the difference between a good business and a great business is how well they manage their cashflow. Small businesses often focus on profit and how much money they are going to make, however, lose sight of their day-to-day cashflow requirements and end up in the red.
It is important to first understand the difference between profit (which is what your budget plans) and cash (which is where a business cashflow plan comes into play). Put very simply cashflow is the difference between money going out and money coming in and the timing difference between the two. For example, if you make a large order for stock on Day 1 and the supplier invoice is due to be paid in 30 days (outgoing money); if by the end of the 30 day period you have not sold enough stock to cover the purchase cost you will have a cashflow imbalance as you have more money going out than coming in.
Understanding and identifying these cashflow imbalances is the key to avoiding disastrous cash shortfalls. The best approach is to develop a separate working document which takes the figures you have projected in your 12 month budget and adjusts these figures for the timing of cash payments and receipts. For example, if you have 60 day customer payment terms you would anticipate that sales you make in July would generate cash into your bank account in September. Your cashflow statement would reflect this. Once you have a working cashflow statement you can then look at the impact of a decision to change payment terms to 30 days and see the difference this has on your bank balance.
In any business, cashflow can be managed in different ways, here are some hot tips to increase your cashflow:
1. Offer customer discounts for payment within a limited timeframe
2. Have strict policies for collection of outstanding customer accounts
3. Control inventory levels to limit the amount of cash ‘tied up’ in stock
4. Negotiate longer payment terms with your suppliers