By Keith Tully
Cash is the lifeblood of any business, and without it, your ability to pay bills as they fall due is compromised. But whether cash flow or profit is more important depends on the financial and trading circumstances of your business.
A profitable company can usually gain access to cash via business loans or other sources. The same cannot be said for businesses with plenty of cash but little profit as ways to increase profit levels are more limited, the requirement being to sell more products or services, increase profit margins, or reduce costs.
Having positive cash flow means you can meet all liabilities in full, and on time. To reach this happy position, there are certain implications and requirements for specific business areas, including:
• Credit control
• Chasing payments
• Stock levels
• Company growth
The good news is, it’s not difficult to set up systems and procedures that help to bring cash flow under control. You just need to be aware of their importance, and be willing to use them consistently.
What Processes Should You Implement?
Credit-checking new and existing customers — Credit-checking new customers helps you to set their initial credit limits, but it also makes sense to carry out periodic checks on existing customers as their financial situation may have changed since first becoming a customer. Keeping an eye on their credit rating will help you spot any downturns.
Setting strict credit limits — Setting and sticking to credit limits helps you control debtor levels. You can set up an automated system to let you know when anyone exceeds their limit, and place a stop on their account if necessary.
Regularly chasing up late payments — A reliable system of chasing payments that includes reminders, statements and final warnings will help to improve the cash situation. Computerised systems make it quick and easy to email invoices and other documents to your customers.
Keeping stock levels under control — Holding too much stock uses up working capital unnecessarily. Even though the intention is to sell stock quickly, there is no guarantee that this will happen, and as time progresses its market value may decrease.
Controlling business growth — It is not always the case that business growth is good. Before taking on a large order, you need to know that the company can cope with the demands of taking on extra staff or buying new materials. Delays between paying out for materials and getting the money in once work is complete can sometimes lead to irrecoverable cash flow problems – a situation known as ‘‘overtrading.’’
Predicting cash flow — Cash flow forecasts allow you to plan well in advance. They help to make business growth sustainable, and let you know when future borrowing might be required in the coming months.
When There Is Regular Cash Flow But Little Profit
Increasing sales revenues and decreasing costs will be a priority if cash flow is good but you are seeing very little in the way of profit. Various strategies exist to encourage profit, including increasing margins and lowering costs.
Check your prices — It seems like an obvious one, but benchmarking your business against competitors could reveal an opportunity to increase profit margins. Some businesses introduce a ‘‘premium’’ level product or service that adds value without being too costly for the company. Not competing on price allows you freedom to add value in other ways, such as improved customer service.
Introduce new product lines — Using social media to canvass existing customers about new product lines could improve profits in the longer-term.
Focus on profitable customers — Narrowing down your focus to customers that bring in the most profit, offering them add-on products, and regularly upselling associated items should see profit levels rising quickly.
Cut operational costs — This is the other side of the coin when you’re trying to increase profits. Keeping a check on suppliers’ charges combined with some tough negotiating of contracts could result in lower bills.
Knowledge is power, as they say, and without knowing how much you are paying each month, you can’t improve your financial situation. Making regular comparisons against previous years or other businesses in your industry can also help.
Cash in the bank is the reality of your situation. Known as the Banker’s Mantra, this phrase summarises what really matters in business: “Turnover Is Vanity, Profit Is Sanity but Cash Is Reality.”
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