This post is one in a series designed to help SME businesses benchmark their business and create a best practice business improvement plan across all of their business processes. You can find the links to the full series here.
Why is effective cashflow management essential to a successful profitable business?
Cash is critical to business success. While our focus might be on making sales and profit, if this is not translated into cash, our business will go down. 40% of business failures are due to lack of cash.
We need cash to pay our staff on time and keep them happy. We also need to pay our material suppliers, otherwise they may not deliver the items we need to get a job completed.
Having enough cash in the bank means that cashflow problems do not become a distraction which takes us away from other important issues of running the business.
How does your business measure up?
Here’s a checklist to help you determine how well your business is managing cashflow.
- We raise sales invoices promptly after completion of work.
- We only purchase stock when we have a high degree of certainty that it will be used promptly for client work or resale.
- We have clear terms and conditions on our sales contracts which include expectations for customer payment.
- We ensure that we have the appropriate customer approval for work performed.
- We prepare cashflow forecasts monthly to ensure that we have no surprises when there is a funding shortfall.
- We have access to short term funding if we have a cash shortfall.
- We have a clear process to follow up outstanding debts.
- We take steps to slow down the rate of cash payments wherever possible.
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