Cash: Keep It Flowing

Cash:  Keep It Flowing

I learnt the importance of cash when I purchased my first car in 1991.

It was a Toyota Corolla and I managed to get $500 off the list price by paying cash to the dealer.

At that time, I never thought about how my cash bargaining impacted the business – nowadays it’s all I think about! It’s all my clients think about!

Keeping cash flowing into a business can be a balancing act but if you prepare your cash flow statements and forecasting, you can mitigate the risk of your cash disappearing during quieter periods.

Here are my tips on keeping your cash flowing in and managing your cash during the quieter periods:

1. Staff

Your staff should understand how important cash is to your business.

Whether it’s customer service offering a cash discount, accounts receivable ensuring bills are paid on time or simply managing cash at the til, your staff need to know how their job impacts cash flow and what they can do to help keep it positive.

2. Balance

If, on the business journey, you experience a bumper cash inflow make sure you keep some for that rainy day.

This may sound simple but if you have a growth strategy it can be tempting to implement that when cash flow is positive without taking into consideration the cash required during quieter periods.

Know when your quieter periods are and keep cash balanced or positive during these periods.

3. Cash Cow

Understand where in your business your cash cow is, when it moos and whether you can create a few more!

Cash cows mean you have hit a sweet spot in your business and it’s time to see how you can either exploit that market or differentiate to find a new cow.

4. Clients

Do business with people who pay on time.

Clients are the only reason you are in business and if they don’t pay on time or at all then the impact on your cash flow can be significant.

A friend of mines grandfather ran a printing business, if clients were over 120 days late he used to go to their work and stand with a sign saying:

“Client X owes me X and won’t pay”

Usually the client paid immediately or the very next day.

Perhaps that’s a little drastic and might be poor relationship development but it taught me the importance of working with clients who pay on time.

5. Paper trail

Cash can be an accountant’s worst nightmare.

It is tempting to not declare a cash transaction to avoid a higher tax implication however, to avoid the interests of the ATO it’s best to keep a record of cash transactions and depending on your business avoid being paid too often in cash.

A paper trail is easier to explain than a trail, which on paper shows a hole in the business.

6. Check Your Ratios

Investors are good at assessing a company’s liquidity and basic investing tells us that liquidity is measured by two metrics:

Current ratio: current assets divided by current liabilities

Quick ratio: cash + accounts receivable divided by current liabilities (Cash + Debtors ÷ Current Liabilities).

Quick ratio is a stronger indicator of business growth, the higher the quick ratio the higher the probability of a reinvestment into the business (an indicator of growth).

If you follow points above you should find that keeping cash flowing into your business becomes easier and with positive cash comes growth.

If you want to read more and learn about Cash Flow Forecasting please read my article 5 Tips For End-Of-Year Cash Flow Forecasting recently published – here.

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