Keep The Cash Flowing

Indeed, few would argue that having a good cash flow is the very lifeblood needed to keep a business going; and that without it, it won’t be long before the enterprise withers and dies.

What makes cash flow?

There are four components that make up the cash ‘inflow’ to your business. These include the sales of products and services, loans or credit card proceeds (either that have been borrowed by the business or in a personal capacity; as well as money owed by debtors), asset sales (vehicles, computers, etc), and dividends paid by owner investments. On the flip side of this are the amounts that cause cash to flow out of the business – business expenditures (day-to-day running costs, salaries, etc), loan or credit card payments, asset purchases, and owner withdrawals (taken out of the business for personal use). Cash flow also fits into three main categories – operating (sales and expenses), investing (assets bought and sold), and financing (loans and withdrawals).

Understanding where and how your cash flow takes place will give you a good indication of how healthy your business is. For example, most of the money that you generate should be from the sale of your product or service – if it’s from investing or financing, alarm bells should sound that your business is not in a sustainable situation.

Keep it healthy

To get a good handle on your business’s cash flow, you need to have a ‘real-time’ grasp of where things are at – you cannot simply wait till month-end to realise you are out of cash; cash flow management needs to be proactive rather than reactive. A simple way to do this is to use an accounting package to generate a cash flow statement for you. Cash flow projections are essential in order to help you understand the way your cash operates – what times of the month will be ‘cash crunch’ times and what expenses need to be paid before then. Knowing where your money is coming in from and where your money is going out is key to controlling your cash flow.

Once you’ve ascertained this pattern, you can institute principles that will help make provision for a healthy flow. These might include:

Matching debtor and creditor terms

Ideally, you’ll be able to structure your debtor and creditor terms in such a way that cash is collected from debtors before creditors are due to be paid. It is also favorable to negotiate short payment terms with your debtors (get the cash in as quickly as you can) and longer payment terms with your creditors (hold on to the cash for as long as you can).

Manage your clients

Considering the set-up above, when you take on a big client you need to check that they will be in a position to pay you in the way that you need to be paid. Check out their payment track record and make sure that they are clear on when and how you need to be paid – for example, getting an electronic funds transfer is quicker than waiting for that cheque in the post.

Consider a deposit or down payment

You can cushion the effects of late/uncertain payment by requesting an upfront deposit from clients. It will also help you to cover critical initial expenses without having to rely on working capital finance.

Consider debtor finance

This financing option meets the needs of businesses that need to free up cash but don’t want a traditional credit facility. It essentially gives access to funds against invoices that are yet to be paid. This is a popular financing option overseas but is still immature in the South African market.

It’s clear that keeping the cash flowing in your business relies more on tenacity and diligence than on rocket science. Once you understand how the cash works in your business, you can make provisions for the flows and manage them to avoid a cash-dry situation. A lot of cash flow management comes down to speed up your cash collection. Do whatever it takes -write down your terms from the start, invoice early, follow up quickly and consistently, and make it easy for people to pay you – to get the cash in as quickly as you can. Good luck!