Business mentor: Understanding cashflow crucial in business

COMMENT

Q. My accountant tells us we're making a profit, but where's the cash?

A. Paul Vlasic, Master Licensee NZ, replies for CAD Partners:

Cash is the oxygen needed to give life to your business. It is not just important - cash really is king.

The only way to make a consistent, measurable and lasting difference is to adopt cashflow improvement as a consistent strategy, not just when you think of it.

Here is the absolutely critical point: sales, profits and costs do not necessarily coincide with related cash coming in or going out. Your cash can be in one of only four places - we call these the four pillars of cashflow control:

* Customers (debtors): Your cash can be tied up in goods or services provided to customers but they haven't yet paid you.

* Suppliers (creditors): You often have to pay for goods before customers pay you.

* Stock and work/jobs in progress: Your cash can be tied up in material and/or labour costs for jobs or stock items.

* Your bank: This is where you want to see as much of your cash as possible. With good flows of cash here, you get to pay expenses as they occur, you can keep down overdraft fees and, not least, you can pay yourself regularly.

The difference between a budget and a cashflow plan can be confusing. A budget is a forward projection or expected profit from sales ... and the costs of running the business for a given period. Budgets are shown in terms of profit and loss, not cash in the bank.

A cashflow is a plan that shows you how and when income goes in to your bank. It also shows you when you can pay for the items ordered from suppliers. It shows you the labour cost of the jobs you've done.

A cashflow plan lets you see potential bottlenecks way ahead of the event. It is a tool you have to show your bank and/or shareholders how you plan to meet your commitments. But cashflows and budgets are very different. The obvious question the cashflow plan raises that the budget doesn't is this: how do you pay for the outgoing costs before you get paid?

The answers must be one of the following: get a deposit from your customer; promptly send out or include invoices with the goods at the time of the services; negotiate better payment terms with the supplier or a discount for your prompt payments; or put in some more of your own money or extend the overdraft.

If you want help with cashflow management, find an outsider who has been employed and trained by business - one with hands-on commercial experience.

Then it is time for a cashflow strategy which is a set of internal guidelines to control cash. The first step is to write out the rules in relation to each of the four cashflow pillars. Use as many of the cashflow tactics or following ideas that you think are practical for your business.

Few cashflow issues or problems can be resolved immediately. Most take weeks and for many businesses, the task of gently changing supplier, customer and staff habits takes time and persistence.

Apply the 'small improvement, big result' rule. That is, don't try to make one big change with a new strategy. Make many small improvements often.


* A free copy of CAD Partners' booklet How to Control your Business Cashflow and Keep Some for Yourself is available from CAD Partners website.

For more information email Paul Vlasic or call (09) 379-1079.

* Email us your small business question