Cash is still King
We are in an age where we are carrying less cash in our wallets, using mobile contactless payment methods, and most banks are no longer accepting cheques – however the old saying “Cash is King” is still as relevant as ever.
It is of course important that businesses mind their cash – think of your business as a body, your cash is blood flowing through its veins keeping your business alive. In an economy where inflation is reaching 30-year highs, unemployment is at record lows, and the well-publicised global supply chain issues are causing havoc across most industries, the notion of minding your cash becomes critical.
Understanding your cash conversion or working capital cycle is critical to managing cash in your business.
Cash conversion is the length of time it takes you to convert cash spent on inputs (wages, inventory, accounts payable), into outputs (sales to customers).
It not only dictates how quickly you can grow your business by purchasing assets to expand, but also what you as an owner can draw from the business.
On a practical level, implementing some or all of these options for managing and improving the cash position in your business could really help:
- Review Credit Terms offered to Customers: do your customers understand clearly when they are expected to pay?
- Systems: do you use an accounting system to send prompt invoices, statements, and automated reminders? Send the nudge without having to lift a finger.
- Cloud-based accounting: not only do cloud-based accounting systems like Xero make accounting more intuitive and easy for many business owners, but it also gives you the ability to see your bank balances from anywhere, receive and make payments easily, and monitor cash flow – all in real time.
- Payment Gateways: Xero also make it easy to integrate with Stripe or GoCardless, which can result in payments being received twice as fast, removing barriers to payments.
- Reporting: review Aged Receivables reports to ensure debt is being collected, and any regular late payers can be addressed.
- Look to utilise/maximise Credit Terms with Suppliers: it is critical payments are made to ensure relationships aren’t soured but maybe you have more time than you realise.
- Match funding with Asset Lifecycle: if you have fixed assets explore if there is a long-term payment facility. This will often result in lower finance costs and free up cash for day-to-day operations.
- Systems: utilise your accounting system to receive invoices directly from suppliers, or the Governments e-invoicing system – knowing what bills you have coming up sooner will help you plan for these and avoid nasty surprises.
- Forecasting/Reporting: do you compare your budget to your actuals? This can help in identifying where gaps or overruns exist in your business.
The list above is by no means exhaustive, and each business will have unique challenges to face. Understanding some of the key items of your business cash conversion cycle will help you solve cash problems, or leave you with more money to do the things you want. Once the key components have been identified, preparing a cashflow forecast becomes easier. This will enable you to plan for tight periods (Christmas / New Year), see when you might have surplus cash available to purchase new equipment, pay down debt, or recover any money you might have contributed via your current account.
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