Struggling to manage your cash effectively or needing guidance on making the best financial decisions for your cash flow? Try these five approaches to refine your cash management techniques.
Astute cash management is important in any business at any time, but it’s even more critical in times of business uncertainty. Identifying and implementing new approaches to maximise your positive cash flow through cash management techniques is the key to maintaining a successful and profitable cash flow input and output.
We have sourced an excellent resource for managing your cash flow, no matter if you’re business is thriving or struggling. Watch this short video below to discover 5 approaches which can make the best use of cash flow in your business or read the transcript we have provided to understand the difference between positive cash flow vs. profit and how to manage your cash more effectively.
0:03 Hello, and thanks for joining this short video on cash management, something that’s absolutely critical in any business at any time. A quick background on this: yes, cash is a priority in your business. But when conditions are unpredictable, we have to be particularly astute about cash management, and it doesn’t matter whether your business is absolutely thriving. You may have abundant cash resources, but we still have to be really careful on how we manage that cash. Of course, if your business is struggling and you’re battling to pay your bills, you also have to be really, really clear on how we can improve that situation.
0:41 So, a couple of principles which underly really good cash management. One is that profit and cash flow are not the same thing. The bad news is that you may have extended periods of profitability in your business but that doesn’t necessarily ensure you will always have cash at hand when you need.
1:04 But there’s good news, because as we look at the cycles in your business and how your business operates, we may be able to predict when those cash ‘holes’ will occur, particularly in a mature business. That’s more difficult in a brand-new business. And if we can predict when those cash ‘holes’ will occur, we can manage by speeding up the inflow of cash. That might be getting the invoices out more quickly or delaying your payments so that we can avoid those cash ‘holes’. And if we do that, there’s more good news because we can create policies, procedures, behaviours [and] habits in your business which make those things normal and will avoid those cash difficulties. That’s a huge benefit for management which can avoid the stress of worrying about cash problems and they can focus their attentions on something more productive in their business.
2:00 Another principle in good cash management is to try and avoid credit wherever possible. Now, one part of this is borrowing. Some of you will say, ‘well yes, the cost of capital right now is really low, we ought to be borrowing’, but that by itself is not a good reason. What we have to focus on is the very clear and positive return on investment we may be able to achieve by borrowing. We have to get back way more than those funds than we ever pay for those funds, and it has to be the best use of our funds as well.
2:32 The other side of credit is trying to avoid giving credit to others. Often, in many industries we allow our customers to pay us over time. We extend credit to our customers, and because it’s the industry standard that doesn’t make it the right thing to do. After all, we have to manage our businesses first and foremost. If we don’t do that, we’ll never be able to serve those customers. So, let’s focus on credit policies which make the most sense to our business.
3:03 Another technique that some businesses use when they run into cash difficulties is discounting. This can be a very intelligent strategy. We might encourage our customers to pay us up front because of those discounts or even order much more. But we have to be really careful because when we discount, we’re obviously getting less for our investments for the products we’re making available in the market. And we may not be able to cover the bills later. And you know, quite often, our customers would have paid us the full amount for our products in any case.
3:39 Now here’s a really important topic – all of our business have an underlying business model. That means that we are offering a product which the market wants, and the market is willing to pay for. And if that is the case, we will be able to generate cash from sales, from our revenues, and that’s the cash we ought to use, and put at risk. Not cash from outside sources and especially not until we have validated that our business model is working.
4:11 So have a good think about your business model in your business. Can you say that your customers absolutely want your products and are willing to pay the prices at which you are offering them. If so, you should be generating cash from those sources. We must be very clear on that topic in our business.
4:31 And finally, finance processes. This may sound a little mundane but it’s really important. If we can get really good at invoicing – invoicing on time, invoicing accurately and procuring from the right vendors and paying the right prices, collecting the money on time and ensuring our accounts payable process is advantageous to our business. This will really help us in cash management.
4:57 We hope you benefited from those five ideas on cash management. Please join us for our future videos. Thanks for your time now.
These 5 approaches limit the stress on businesses aiming to generate or improve their current cashflow by knowing how to take advantage of opportunities without making potentially risky investments or damaging cash management choices that leaves a cashflow hole.
The video outlined the 5 key processes to improve your cash management.
- Profit does not equal cash flow
- Avoid credit
- Avoid discounting to fill a cashflow hole
- Use cash generated from sales for investments
- Finance processes matter
Cash flow is critical to any business, especially in times of market uncertainty. By implementing these recommendations to your business, you can ensure your business runs smoothly and remains steady despite uncertainties, allowing you to take advantage of investment or profitable opportunities and promote future growth through successful cash management. Beyond Advisors offers expert business and finance advice for businesses or all shapes and sizes. For any further enquiries on managing your cash flow or assistance on improving your business’ growth or government, you can get in touch with our helpful team and start your business success journey.