Cash flow the lifeblood of every business

It is vital to develop and ensure you monitor and update your cash flow projection regularly, writes Christine Christian.

Current estimates indicate that about 90 per cent of business failures are the result of poor cash flow and, with the new financial year, now is the time for businesses to ensure they have their books in order. The lag between the provision of a product or service and receipt of payment can create a significant burden for business, particularly if you have slow payers among your customers. Bad payers considerably reduce business cash flow, draining the funds required for day-to-day operations.

In addition, delinquent payers consume internal resources as staff are forced to chase overdue accounts.

Dun & Bradstreet's data reveals that business-to-business trade payments have escalated to their highest level since 2001.

Firms are now waiting an average of 55.8 days to receive payment. That means they are being denied access to their own funds for almost four weeks longer than the standard term.

While the extension of credit is a necessary part of growth, the way it is managed will determine whether it increases profitability or has detrimental ramifications.

Executives need to ensure they have solid cash flow management and risk mitigation processes in place so they can stay ahead of the game. In its most simple form cash flow management means delaying cash outlays for as long as possible while encouraging anyone who owes you money to pay on or ahead of time.

An effective cash flow process requires the preparation of cash flow projections at least quarterly, if not more frequently. While this may seem like a timely undertaking, an accurate cash flow projection will alert you to trouble before it occurs - it is one of the most important things a business can do. A cash flow projection needs to account for both incomings and outgoings. How much cash is the business going to get in and pay out, and when will these actions take place?

When drawing up a cash flow projection it is important to identify both set and variable costs, and to take into account customers' payment histories as these items will influence the amount and timing of incoming and outgoing funds.

Shortfalls and seasonal fluctuations need to be considered. A business should be aware of slow sales periods or seasons in which customers are more likely to pay late.

Be sure that you have enough cash on hand during these periods to cover inflexible business costs such as wages.

Simply forecasting your cash flow is not enough; you need to put in place a continuous monitoring process to keep your inflows and outflows in check.

http://business.smh.com.au/cash-flow-the-lifeblood-of-every-business

Business Financial Services

Cash flow the lifeblood of every business