Last week we looked at exactly what cash flow is and this week we will look at the ‘how to’ of managing cash flow. For me as usual, it’s the simplest method of ‘how to’ that I will be sharing, so please just be aware that there are many more components and levels of complexity to this subject.
It is important to understand that most of the money that you generate as an inflow should be from the sale of your product or service. It cannot be from investing or finance – if this is the case you are going to be very deep in the smelly brown stuff without a shovel to dig yourself out. So sales are obviously key, irrespective of whether you are selling a product or a service.
It is also important to understand that the inflow and outflow of your business tells the story of how healthy or unhealthy your company is. That is one of the reasons that I believe it is so important to have the services of a really good accountant to assist you. The understanding and ‘reading’ of the story of your business can only be done by someone who is experienced in these matters and someone who will tell you where you are going wrong and guide you back onto the correct path. My someone, is Nico Labuschagne of Less Tax 4 U and I am quite happy to share his contact details if you ask for them.
That said it is also very important to understand that cash flow is a ‘real time’ issue as opposed to having your books done on a monthly basis – by the time they get to the bookkeeper/accountant they are already a month or so old and are therefore a ‘reactive’ issue. You cannot wait for a whole month to then realize that you have no money to pay the bills that are coming in and are due, right now! In terms of cash flow, you have to be proactive – you have to know what is happening right now!
To create a cash flow statement, and remember that it is a living breathing document and it changes all the time, you need to take all the business inflows and subtract all the business cash outflows. This is usually done on a monthly basis but it can be done for any specific period. Obviously doing this manually is a pain in the rear end and by using an accounting package to generate financial statements and thereby producing a Cash Flow statement, would be the simplest way to do it (another reason for a Nico in my life, I don’t have to invest in expensive software accounting packages.)
When you work out your budgets, it is extremely important to use ‘cash flow projections’, because if you as a business owner, do not understand the way that your cash flow operates, you will find yourself in a cash flow crunch, where you will be waiting for funds to come in, but have operating expenses that need to be paid now.
This is particularly true if you have or run sales on account (hopefully you are then registered with the National Credit Authorities as a service provider), or alternatively have clients who pay 30 or 60 or even 90 days. You need to make provision to ensure that you have enough cash on hand to pay your bills while you wait for monies to come in.
As SMME’s, I am sure that you will agree that this is a very difficult position to be in and this is why it is vital to firstly know, what is happening from a financial prospective, in your business and secondly to understand what happens when you have cash flowing both in and out of your business.
Understanding and knowing where your money is coming in from and where your money is going out to, is key to controlling your cash flow.