Minimising the Cash Gap and Increasing your Cash Flow

Whether your business is growing or struggling, managing your cash flow effectively is absolutely essential, and for many, the very key to business survival. You may have heard the statistic that over 60% of businesses that go bust are still profitable, but just ran out of cash.

Whether your business is growing or struggling, managing your cash flow effectively is absolutely essential, and for many, the very key to business survival. You may have heard the statistic that over 60% of businesses that go bust are still profitable, but just ran out of cash.

 

As the name suggests, cash management is all about managing your cash flow by understanding how your business works, having access to adequate working capital and then adopting a planned and proactive approach. Running out of cash is stressful, not counting the additional costs and finance charges that generally follow.

 

Here are some tips to help your business minimise that cash gap:

 

 

    • Understand and accept the amount of working capital the business needs to operate. How much inventory do you hold? How far behind in invoicing are you, or how much cash is tied up in work in progress? What do your customers owe you? What is the time between  paying your suppliers to receiving cash from your customers? All these will soak up your cash like rain in a desert.

 

 

 

    • Ensure your business has enough cash to fund your working capital needs. They used to say to keep three months worth of outgoings in the bank for a rainy day. That may be a thing of the past, but it is important to have a buffer of some sort. Or maybe cut your drawings, as retained profits are by far the best and cheapest source of working capital.

 

 

 

    • Plan ahead. It’s no good finding out in your down season that you can’t survive until things pick up when you’ve already reviewed and agreed your borrowing facilities with your bankers. Prepare some cash flow forecasts for the coming year. If you find it difficult to predict your sales, complete all the outgoings first, and then see what sales you need to cover your outgoings. At least then you have a known target.

 

 

 

    • Review your systems. Do you forget to invoice customers? Do you invoice as you go or just at month end? How quickly do you collect your accounts receivables? Many do not even know how much is owed to them by their customers or how much they owe to suppliers. When was the last time you checked suppliers costs to ensure you haven’t been overcharged or been billed for items you haven’t received?

 

 

 

  • Speed up your cash conversion cycle, which measures the time span between disbursing and collecting cash. It is very common for this to be 180 days or more, especially in manufacturing or businesses with inventory. Ask for a deposit, put customers on retainers or set up monthly payment plans. Cut your inventory levels, maybe by arranging for your suppliers to deliver the same or next day, or negotiate longer payment terms.

 

 

    • Make it as easy as possible for your customers to pay you. Always quote your bank account number on your invoices, and ask for direct credits or automated payments. Why wait for a cheque to be posted in this day and age? That keeps the money in their account when it should be in yours.

 

 

If you need guidance with any of the above, call Fortunity’s Business Advisory team on 02 4304 8888. We’ll use our tools and experience to help forecast and get your cash flow on the right track. That way you can be in the very best shape to grow your business and reduce your cash gap.

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