Everyone understands the importance of cash to a business, without it suppliers, wages, and taxes could not be paid and the business will eventually fail, in addition every time a business sells a product or service it runs the risk of not being paid by the customer. One of the main concerns in any business should be its cash flow management, ensuring that debts are collected promptly and sufficient cash is available to pay its debts as they fall due. In the current economic climate this has become even more important as businesses hang on to cash as long as possible and many companies fail and cannot pay their debts.
Below are a few tips which could help to improve cash flow and reduce the possibility of bad debts:
- ensure credit checks are carried out on all new customers, if possible get references from at least two current suppliers, it is also advisable to keep an ongoing eye on existing customers so that you are aware of worrying changes in their credit ratings.
- have a robust but fair debt collection policy, this will indicate to your customers that they will be expected to pay at the required time and there is no room for slippage, it also lets your credit control staff know what action to take and when to take it.
- if a potential customer has a poor credit record, rather than lose a sale talk to them to see if there is a way around the problem, for example would they consider paying money upfront.
- look for the warning signs of cash flow problems in your management accounts, keep an eye on the current ratio (current assets/current liabilities) this should be over 1, if it is under 1 or there is a trend showing it falling towards 1 then further investigation would be required. Another ratio to consider is the acid test ratio(current assets-stock/current liabilities) this omits stock from the calculation as it is considered as an asset which cannot be quickly turned into cash.
- understand what the businesses cash flows are, think about the timing of the cash flows in creating your product or service, what are your suppliers credit terms?, when do you pay wages?, what credit terms do you give your customers? The answers to these questions will impact on cash flowing in and out of your business.
- if orders are coming in and business is booming do not assume that cash flow can be ignored, often businesses can have problems from expanding to quickly, this is known as overtrading, the cash flows of an organisation need as much consideration at times of business growth as in the more difficult times.
- regularly monitor your cash flow forecast, it could provide advance warning of a potential problem that could be solved if you take action now.
If you are thinking of starting a business or you are running your own small business please take time to visit my blog where you will find items that are of interest
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