Running a small business is hard work. Most times the founder of the business has to wear many hats to keep the business running. One of the many hats a founder wears is the cash manager's hat.
Constant flow of cash is key to keeping a business afloat. Without cash or liquidity as it is called in the business world, a business will shut down. Small businesses need to know that a profitable business from an accounting profit definition point of view would not survive if the profit does not result into cash flow.
One of the fundamental things that small businesses need to learn is that profitability is different from being cash healthy. While having a profit and loss statement is good, having a cash flow statement is better. As a small business, the phrase "Cash is King" should be your watch word.
The flow of cash in and out of a business results in your working capital.
Working capital is simply your current assets minus your current liabilities. In simple terms, current assets include your receivables, inventory and cash at hand or bank while your current liabilities are your payables that are due in less than a year. As a business, the key to keeping your business afloat is to ensure that your payables are less than your current assets at every point in time. Please bear in mind that having access to borrowed cash even from friends and family should not be considered cash but a loan which is a liability. I've seen many businesses who tend to run on borrowed money.
Below are a few tips on how to manage and improve your working capital.
1. Cash Management - Ensure you have a report that tells you how much cash the business needs to run on a day to day business, how much you need to pay out daily and how much daily cash collection the business needs to meet those payables.
2. Inventory Management - While buying in bulk gets you great discounts, be careful not to tie up cash in stocks that you can not convert to cash quickly. Apart from tying up your cash in inventory, you run the risk of having to pay for storage or even loss of money due to employees stealing your stock especially if you do not have a proper inventory management process in place. As a business, get to know how much stock you sell monthly.
3. Debtors Management - This is one of the biggest contributors to business death within the SME sector, business owners believe they need to sell on credit to attract customers. A lot of small businesses are quick to tell me that if they do not sell on credit, they lose customers and I am quick to tell them that very soon you will have no money to pay your own suppliers if you keep selling on credit. The key is to have a credit policy in place and enforce it. Make sure that the credit policy you put in place is in line with the credit policy that your suppliers are giving you. So if your customers want 30 days credit, try and negotiate 45 days credit with your supplier. The key is to have a credit policy that involves both cash and credit payments and be able to control the cycle of your debtors versus creditors.
4. Short Term Financing - Identify sources of short term finance that you can access and utilise quickly if you run into cash issues. A few to consider include supplier credit, trade finance, short term business loans and overdrafts. Short term financing should be a short term measure and not a long term business strategy.
The list above is not exhaustive, but it captures a few processes that can be put in place to help manage your working capital or cash flow within a business. I would always advise that businesses get professional advice to help them put tailored processes in place. I am of the school of thought that a consultant is always cheaper than a closed down business.