Cash is king, but does it rule alone?
Monday, November 25, 2013/
Cash is king so… what are we doing to protect and manage it?
There is no doubt that cash is the life blood of every start-up and small business. So it needs to be protected and managed. Some tips on managing cash include:
1. Cash flow budgeting;
2. Managing your debtors (people who owe you money) – invoice as soon as you can, receive cash up front, have clearly communicated terms of trade, ensure there is a process to systematically collect the cash due to you, consider the use of debtor funding;
3. Manage your creditors (people you owe money to) – shop around for the best value, take advantage of settlement discounts, use the full terms of trade to pay;
4. Manage your stock – don’t over stock, know your reorder points, move slow or obsolete stock, minimise waste, keep tight stock controls;
5. Have funding facilities in place – based on your cash flow budgeting have facilities in place to provide cash when you need it, for example a loan, an overdraft, credit card limit.
Cash is king but … is it the only indicator of our business we should focus on?
Many business owners monitor the health of their business based on the cash in the bank. However, if we only focus on this business indicator we will not see the whole business picture. Other important indicators include:
1. Profit – this indicator shows the actual money the business is making and includes payments you are still to make and invoices not yet paid by clients to you. Your cash balance alone does not accurately provide this information. As an example a business where all the debtors have paid but the creditors are long outstanding may have a healthy cash balance but may be making a loss;
2. Product margins – these indictors show the profitability of each of your product lines. This information is vital when assessing which products to stock to have a profitable business;
3. Key Performance Indicators (KPIs) – these indicators will vary from business to business however the following are commonly useful. Number of existing clients, number of leads for potential clients, conversion rate of leads to new clients, average number of sales per client, average number of dollars per sale. In fact if all the above KPIs were put together it would represent the total sales in your business.
One reason why many business owners focus on the cash in the bank is because this information is readily obtained that is up to date to the day.
There are now however many technologies available to enable the other important indicators to be up to date to the day also. For example there are bookkeeping packages with daily bank feeds that are so automated that with only a little bit of effort the profit of your business can be updated daily. If you would like to know more don’t hesitate to have a chat to your accountant.
So cash is king but it does not reign alone!
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