As a business owner, do you have consistent sources of cash to fuel the growth of your business? We’ve discussed different important aspects of managing a business – people, strategy, execution – but the truth is, as a growing business, you can’t go a single day without cash. Furthermore, poor accounting systems make it difficult to know whether a business is truly succeeding. These are the 3 things needed to get your cash flow and business’ finances on track:
Cash is the oxygen that fuels growth. What is important to know here, is how long it takes for each Rand a business spends on anything (from rent, to marketing and buying stock) to make its way back into the business. This is what is called the Cash Conversion Cycle, and the shorter yours is, the better.
The Cash Conversion Cycle isn’t just about managing your inventory, debtors and creditors more effectively. It is also about eliminating mistakes throughout your business that cost you money. One of our clients went away and calculated the cost of having to pass a credit note as a result of an error, at R321 per credit note. He then identified that they were passing over 1000 credit notes per year at a total cost of R321,000. Focusing on eliminating these errors not only improved cash flow but resulted in happier customers.
Some advice to business owners: When looking for an accountant, recognise that there is a difference between an accountant who can interpret what your financial information is telling you about the business and one who simply prepares the financial information. For interpretation, you may wish to bring in a part time CFO using a service provider like the FD Centre.
A good accountant should be able to:
- Manage your cash and cash-flow better.
- Help you make better decisions by showing you granular accounting data that lets you view the gross margin, profit and cashflows by categories – such as individual customer/client, product line, salesperson, etc.
- Perform trend analyses and develop early-warning systems to support forecasting and predictions.
Understand the impact of changes to your 7 key financial levers
The 7 financial levers are: Price, Volume, Cost of Sales, Operating Expenses, Accounts Receivable, Inventory/work in progress and Accounts Payable.
Your task is to understand what benefits arise for cash flow, if slight percentage changes are made to these areas. This will help you construct a rigorous plan to ensure that reach your cash or returns goals.
Have a look at this 1-page Cash Acceleration Strategies (CASh) tool, to help you brainstorm specific strategies for increasing your cash flow.