“Cash is a king” you might have heard this many times. However, I must say the “Cash is Super King”.
Better managed cash flow is a very important financial tool that can change your business and push it to move forward. In simple terms, cash flow is money coming in to the business and money going out of the business.
Think about a water tank, when you take the water out you also need to fill it from the top. In order to ensure, the water tank does not run out of water you don’t want to take out more than what is coming in. You will have to check the tank many times to see the water level, and where there is a leakage find and fix it. In a same manner, you need to maintain optimum cash level for survival of your business.
You might require cash for many things such operations including payment to suppliers, employees and the IRD. You may also need to cash to pay off loans, buy assets and emergency funding’s.
Ideally 3 months of your sales should be in cash reserve funds. This cash reserve fund may act as an emergency funding or you can use it for regular operational activities.
How to improve and ensure your business is cash rich:
- Ensure your cash is collected in most effective manner.
- Send invoices as early as possible.
- Send reminders if payment is not received on due date.
- Give them plenty of options to pay.
- Ideally payment should be received at a time of service, use of mobile eftpos, direct credits etc.
- Always ask for deposits/ part payments for one off jobs.
- Separation of business expense and personal expense is very important. You have to treat your business as an individual identity and do not use business accounts for personal expenses.
- Pay your insurance premium yearly. This will save you on an average 10% premium and then you don’t have to pay them monthly.
- Asset purchase: believe in ownership don’t rent or lease assets. If you do not have money to buy an asset, save for some time, may be use second hand asset until you are ready to buy brand new.
- Refrain yourself by getting into unnecessary fixed monthly expense. The whole idea is to ensure your fixed cost is lower.
- Until you can see some returns on investment, do not invest in that asset. For example, your current office printer may be doing the job ok. But, before you commit to a new printer you need to see how much savings in time & money it can bring to you.
- Hire a good accountant who will help you to structure your business so that you can save tax.
- Invest your positive cash flow in investments that can give you positive returns. This will always give you excess cash in hand.