What is the real meaning of cashflow management?

The lifeblood of, and usually the greatest stress on a small business is cashflow.  Your bankers talk about it, your accountants talk about it, your spouse may talk about it; but what really is cashflow and how do we use cashflow management strategies effectively?

What is Cashflow?

Defined as:

Cashflow (noun)

“the total amount of money being transferred into and out of a business, especially as affecting liquidity.”

But what does that mean?  This is the common question that has been asked by small businesses owners in my experience.  “My business made ‘x’ profit last month, why don’t I have money in my bank account?”  Sound familiar?  This is because of the way reporting works in businesses.  Effectively, cashflow is how much physical money was paid into and out of the business, which is different and separate from profit and loss.  You can make $20,000 profit in a month, but if all of that revenue has not been collected, physically attributing money into the bank account, then cashflow will be affected.

The common cash outflows for small businesses are paying wages, paying creditors too early, owners taking drawings or making loan repayments.  If these amount to more than what was physically banked (collected) from your customers, you have a cashflow issue.

How do you fix cashflow issues?

There is no easy, quick fix for cashflow issues.  Most have been brought about through poor debtors management by lack of follow up or customers being accustomed to late paying; or through a lack of understanding as to how much to draw out of the business, or leverage, or resource.  Fortunately though, there are some quick wins to help with cashflow management.

  1. Invoice on time – it is amazing how quickly invoices can be forgotten when a job is complete.  Especially if you have trading terms (such as 14 day payment), getting your invoices issued as soon as possible after the job is complete will go a long way to helping your cashflow
  2. Send regular statements – there are many systems and apps available now that make the process of sending statements a breeze.  Set a regular time each month (or twice a month) to send statements to gently remind customers of outstanding amounts.  Sometimes it is the gentle reminder that works wonders
  3. Create a cashflow budget – budgets can be complex things; but a cashflow budget is worth its weight in gold for keeping on top of payments out.  Start by creating a week by week table and entering in all of your obligations as they are due.  Have your opening and closing bank balances in each week and you will see what cash you need to collect or what obligations (such as creditors) you need to defer due to the surplus or shortfall
  4. Take advantage of creditor payment terms – some business owners pay creditor invoices when they receive them and do not take full advantage of payment terms – this creates a cash shortfall.  Always look for when a creditor is due and hold off payment until then
What else can you do?

Understanding what cashflow is and introducing sustainable cashflow management practices is vital to the success of a small business.   The quick wins I mention above is literally the tip of the iceberg when it comes to cashflow management and having the right team around you is vital.  At Bizee Management Solutions, we specialise in cashflow management and putting the correct systems in place to assist with your cashflow.  For a free consultation on how we could assist your business, please use our contact form below.

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