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You have a great plan. Business is underway;
the product is right, you have recruited the people you need
and orders are booming. Then you run out of money, and it's
all over almost before its started.
It may be a depressing thought, and you
may not want to hear bad news - but over 80 percent of businesses
fail in their first five years. And the major reason is not
that they don't have enough orders, it's that they have too
many. They have failed to manage their finances and overlooked
the costly truth - growth costs money.
To stay afloat, then, you must prepare
for all likely eventualities and cash flow planning is one
of the most important steps you must take. Failure to keep
track of cash flow and to respond to impending cash famines
wil bring your dream to a premature end.
It always puzzles us that so many business
owners don't take the time needed to gain an understanding
of basic accounting principles - surprising given the importance
of financial control to the success of any enterprise. Knowing
the basics makes it far easier to manage cash flow. There
are, of course, plenty of books that give an introduction
to accounting for non-specialists.
Within any business, there is an operating
cycle through which cash flows, from the purchase of trading
stocks through the collection of cash from debtors. The cycle
('cash gap') measures the rate of flow of assets into cash
your operating cycle from the purchase of supplies through
the collection of debtors totals 180 days, this is the amount
of time for which you have to find finance.
Since all lenders look for a return on
their investment, this financing will, of course, cost you
money. The longer your operating cycle, the higher your financing
cost will be. It is important to analyse your operations and
forecast your cash needs to minimise the amount which must
be borrowed without running the risk of becoming short of
cash.
Cash flow projections should show whether
your business generates enough cash to meet its obligations
and ho payments due to suppliers and staff can be related
to cash inflows from sales. As a result, you can tell if inflows
and outflows from your operation combine to result in a positive
cash flow. Any significant changes over time will also be
apparent. Understanding this will allow for better control
of your cash position and allow room to plan for the extra
financing that growth in your business will call for.
When cash-flow deficits are identified,
plans must be altered to bring in more cash. When excess cash
is revealed it might indicate too much borrowing or simply
that you have idle money that could be better used. The purpose
is to develop a plan that will provide a well-balanced cash
flow.
When problems appear, how can they be
overcome?
Collecting debtors has to be first on
the list of areas to look at. Your customers must be actively
and consistently managed so that overdue accounts are promptly
identified and collected. Money is lost when a firm's collection
policies are too soft. The longer your customer's balance
remains unpaid, the less likely it is that you will ever receive
full payment. Conversely, the faster you collect on your debtors,
the less your cash gap will be.
Control of what you owe is just as important
- but this is best dealt with not by delaying payments beyond
their due date, but by planning what you need and negotiating
extended terms with your suppliers.
And do not overlook the prices you charge
for your products and services. Pricing is critical in achieving
a profit and maintaining positive cash flow. Always lowering
prices in response to competitive pressures is a natural but
often inappropriate action.
Go to
part four
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