Gearing up for growth part 4 – Cash Flow
Content provided by Sanlam. See Financial Solutions for Business Owners, for tailormade financial advice.
Cash flow is the fountain of life for any business. Your capacity for managing cash flow effectively, will determine whether your business will grow or fail.
The aim of this article is to provide a few basic guidelines on healthy cash flow, against which to test your existing practices.
- Do you involve experts such as your accountant/bookkeeper, banker, or financial planner to optimise the structure of your cash management? For instance, is the financing term of assets in line with the type of asset? Even if the business has a surplus of cash, it is often better to finance the purchase of current assets (equipment/computers for example), or vehicles, in stead of draining the surplus cash from the business.
- Do you have an annual, monthly and weekly cash flow forecast in place? Do you know the cash position of the business on a daily basis? Good cash flow planning and monitoring provide you with insight into and a clear view of your business’ cash needs, before a crisis develops
- Do you know your net current asset ratio, i.e. current assets ÷ current liabilities? The general norm is 2:1, which means that the current assets should come to at least twice as much as the current liabilities
- Keep an eagle eye on operating costs. It is probably not necessary to buy anything brand-new – for example a fax machine, or a vehicle for the business. A secondhand item will probably be more economical
- Let your cash on hand work, i.e. use investment options (e.g. a money market account) that will maximize the earning capacity of the cash, but still ensure its liquidity
- Make sure that the person who pays the expenses, is not the same person who does the bank account reconciliation. Good internal control measures for the handling and management of cash, are of critical importance
Healthy cash management practises enable you to create cash reserves to capitalise on business opportunities when it comes you way.
Let the following quote always remind us of how we should be thinking about the management of cash.
“Turnover is Conceit – Profit is Prudence, but Cash Flow is Reality.” Ian Reid, Business Adviser
Jannie Rossouw, Senior Business Manager, Sanlam Cobalt
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