By K. C. Soares, Contributor
Soares
I HAVE in past articles suggested ways to start a business. I have also recommended some financial institutions, which may be approached to facilitate the start of the business.
To ensure success of the business that you have just started (or even if you were already in business) you need to follow some guidelines for managing cash.
A business can survive without profit but it cannot remain viable without cash flow. Cash is the lifeblood of the business and its management is a critical area of responsibility of the small business manager.
One may ask - what exactly is cash flow management? Simply put, this means a sense of discipline to carefully oversee a business' resources to generate a sufficient cash balance to operate. The primary resources involved are income, expenses, accounts receivable (money owing to the business) and inventory.
Inadequate management can often be blamed for inadequate cash. Insufficient cashflow can cripple any business and this is even more pronounced in the case of small businesses. At this time, there are fewer new sources of financing available and existing sources are tending towards termination.
It is therefore now even more important to properly manage cash generated by the business. For the small businessman to survive, cash flow must be managed in a proactive and future-oriented manner. In this process, the past is used for only one purpose and that is to establish a benchmark for future expectations.
There are certain key measures that should be taken in order to maximise cashflow. First, one has to be aware of the current state of the business' cashflow and the factors affecting it. For this to be determined one has to analyse financial indicators on a monthly basis. These financial indicators include sales, receivables, disbursements and payables.
It is also of utmost importance that proper internal control be maintained in order to reduce the likelihood of employees embezzling funds.
In a small business, because of the fewer personnel to divide financial responsibilities among, it often takes creativity to achieve an acceptable level of control. In many small businesses it is the manager who takes in the cash and makes the necessary lodgements.
The small businessman should also ensure that expenses do not get out of hand. The two main costs that should be reviewed and justified on a regular basis are personnel costs and rent.
It is also important to establish clear credit policies and collection procedures. These policies and procedures should be written down for existing employees and should not be deviated from without prior authorisation from management. This is necessary for continuity and consistency within the organisation when there is personnel change.
One tool that I would strongly recommend is the preparation of a cashflow projection. This tool should answer three questions. How much cash is needed? When will the cash be needed? Where and how will the cash be obtained?
The cash flow projection assists in anticipating problems and in general gives an idea of what lies ahead. The progress of the business should be monitored against the cashflow projection and it should be revised if necessary.
When targets are exceeded, the reasons for this should be noted and all efforts made to continue doing what is undoubtedly productive. Likewise, when targets are not met the reasons for this should be pinpointed and corrective action taken.
In these times, it is hard to collect money. If the small businessman extends credit to his customers, he should be particularly concerned with receivables that are unpaid for 30 days.
If credit is to be given, not more than seven days should be considered as in the normal course of business these days such receivables are never usually paid until about 30 days. Aggressive collection methods must be put in place as receivables outstanding for more than 60 90 days become extremely difficult to collect.
From time to time, the business may be in need of capital injection. In this regard, it is important to stay informed about alternative sources of financing as they become available. This is usually accomplished by staying in touch with a business advisor or consultant.
Additional methods include networking with other business managers who are not competitors and also attending quality seminars.
In order to keep a business going, you need not only know what you are selling well but also how to keep the cash flowing within your business.
K. C. Soares is a former banker and is now a business consultant with Soledad Financial Services Limited. E-mail: soledad@netcomm-jm.com
