Tool Box
Issue No. 28 - April/May 2006
Cash is King!
by Mr Tony Martin
One of the main reasons that businesses fail is their inability to meet their financial obligations when they become due as they have run out of cash. Knowing how to maintain a healthy cash flow is essential to a successful business.
Cash cycles through the business, from sales, to debtors, cash in the bank, then purchases create creditors and cash flows from the bank.
A healthy flow of cash can decrease the amount of capital required and increase profitability by reducing interest expenses. It can also help you to generate income on surplus funds so the business can expand and grow.
Why worry about cashflow management?
While failure to generate profits is critical to a business, it is only one cause of business failure. Profits don’t guarantee positive cash flow. That is, profit does not equal cash!
A business is at risk of insolvency if it does not have the cash to finance working capital needs. Measuring the movement of money into and out of your business allows you to monitor your position and set in place strategies to deal with shortages and surpluses.
Timing of cash inflows and outflows is the basis of cashflow management. That is, making sure there are sufficient funds to pay essential payments such as wages and salaries, suppliers’ payments and taxes when they fall due.
Yet, surprisingly many small businesses don’t have a cash flow plan, or if they do prepare one, it is rarely updated to reflect changing circumstances.
Improving cash management
Generally, cash flow can be improved by cutting costs, increasing turnover or by speeding up cash inflows and delaying outflows. Some examples of ways to improve your businesses’ performance include:
- Look for ways to increase the number of customers, the frequency of their visits, the value of their purchases (do you want fries with that?).
- Review costs, but be wary of cutting costs that may have a nega...
