A stitch in time saves nine…whoever said that was right. The saying is a warning against procrastination. Putting off doing important stuff until it is more convenient is never a great strategy in personal life and especially in business.
When it comes to your business, it needs to have a minimum amount of cash to remain afloat. Maintaining liquidity requires intentional effort and coordination to ensure that you meet this requirement.
Poor cash flow management has been known to floor businesses. At the root of the famous Enron scandal was the management of cash flow. That is why #MotherlandMoguls who are their own #Bosses need to pay attention to it.
Managing your business cash flow
There are three major warning signs you need to pay attention to when managing your cash;
- Slow Collection: When your sales are not moving as fast as you expected them to or you are not making sales at all.
- Excessive short-term debt: “Short term” usually refers to debt that is due in 90 days or less. The larger this figure is, the higher the chances that your business is cash strapped.
- Overtrading: Making sales is a good thing; the problem is having more credit sales which means that the cash your business should have is stuck with your customers.
Sometimes what happens is that businesses ignore some warning signs and fail to respond to them on time which leads to bigger problems. One of the most important things to do here is to monitor and coordinate when money comes in and when it goes out. The moment you recognise a situation that is likely to put your business at cash flow risk, deal with it at the earliest opportunity. This is one of the lessons that Julia learned.Timing is everything when it comes to managing cash in a business Click To Tweet
A business at standstill
We met Julia in one of our Financial Education workshops. Julia runs a small milk delivery business and she was having a few challenges with her cash flow. A majority of her customers bought her milk on credit which she let them have for a period that was not specified.
When we met her, her main problem was that she was not able to pay her milk suppliers because she didn’t have enough cash on her. Some of her customers owed her for more than two months and the fact that she could not pay for the milk meant that her business was at a standstill. Julia also rents a storage unit where she stocks up her milk; she was in arrears for one month and was about to throw in the towel when we met her.
Lessons from Julia
Timing is everything when it comes to managing cash in a business, you must be sure about the dates when major payments (out and into the business) are expected and when. Some of the tips we gave Julia for her business were:
- First to consider taking a loan as she tries to stabilise her cash position
- Not to rely on her sales to make basic payments such as rent and wages since Julia might not always meet her sales targets. Rather she should have savings that she can dip in when the going gets tough. This savings can be built slowly over time when business is good.
- Not to order excess milk if she doesn’t think she can sell it.
- To compare the credit terms of different suppliers and pick the one that works best to her advantage.
A couple of months later, Julia who had decided to continue her business reported that her business was doing much better as she had found another supplier who had better credit terms. She also instituted stricter credit terms with her customers.
If your business is cash-strapped consider taking on some of the tips we have given and you just might end up with a smile on your face like Julia did.