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Cash Flow Management and the Small Business
Cash Flow Management and the Small BusinessBy Caleb Anderson
Any company, big or small needs to manage its cash flow well, just as much as its sales and expenditure. There are many giants that were seemingly doing very well with steeply rising sales and running massive projects, spending lavishly on research and development backed with advertising campaigns, only to see them crash almost overnight. What is the reason for such unexpected crashes? Since we are told that their sales were doing well and expanding, then the root cause has to be poor cash flow management. Cash flow is the difference between your receipts and payments (in cash, whether from bank accounts or from other source). Cash Flow should not be confused with income and expenditure or profit and loss that is quite different from receipts and payments.
To illustrate the difference between income and expenditure (profits) and receipts and payments (cash flow), let's take a simple working example. A small company gets a contact for £ 1,000,000/- and they calculate their cost of production at only £ 225,000/-. The company is highly bucked at the prospect of making an almost 350% profit on their new contract. With much fanfare, jubilation and congratulations all round, contracts are signed; product is manufactured and delivered to the customer in January. Being a small company operating within a modest budget, it had to borrow from banks at high interest rates for procurement of raw materials etc for this operation.
Customer is paying only in July, which is six months hence. The small company in its eagerness to grab the deal at all costs, had invested all its resources on this special project, and with monthly high interest payments now due to the lending institutions for the next six months until they get their payment from the super contractor to pay off the banks, and being unable to get any further loans, gradually finds itself unable to meet its normal monthly commitments on rents, rates, salaries and wages etc. or keep the production lines rolling for the manufacture of their normal products and already agreed supplies to other customers, even in more their smaller quantities. So the company inevitably crashes, why?
Simply because they did not bother to see how their cash flow would work out during the interim period between spending and receiving money; by only concentrating on making a massive £ 775,00/- gross profit on a single contract!
It would be seen that "over investment" beyond their means led to the above crash. If it had been a bigger company with more assets and resources, it could have got away with it by drawing on their excess resources during the period they had to wait for settlement by the contractor. Thus, it is seen that smaller companies are more vulnerable to cash flow problems than their bigger counterparts. The followingtips should be useful to avoid similar disasters by managing your cash flow well.
Fast Debt Recovery
You should have a very good control over extending credit to customers in terms of time as well as a max limit while always trying to collect your debts as fast and as fast and as quickly as possible so that you could enjoy the advantages of having more working capital. Getting your customers to place their orders online or by fax could help speed up the process of collection. Ensure that you dispatch the invoices along with the goods and that the due dates of payments and the penal rates of interest applicable in case of delayed payments are clearly stated therein.
Formulating a firm Policy of Extension of Credit Facilities and Collection
Each customer should be granted credit facilities on his own merits of proven creditworthiness, possibly in consultation with rating agencies; or by requesting the customer to furnish references. Follow up all late payments immediately with a phone call or a letter or both, failing which legal action may be contemplated for recovery of the debts. Curtail further supplies to a debtor whose account has fallen overdue, until all overdue balances are settled.
Go along with minimal balances in your operating bank accounts
Having a good cash flow position does not mean carrying excess or surplus funds in your operating bank accounts. Instead, judiciously divert some excess funds for re-payment of any loans taken at high interest rates and simultaneously invest in high interest yielding fixed securities or in short call deposits depending on your liquidity position, that is, your ready cash availability from bank accounts, deposits at short notice, good debts recoverable etc. taken together with the estimated cash inflows and outflows for the next two to three months.
The pulse of any business is its cash flow. Therefore strive to maintain it at optimal requirement levels at all times, no more and no less.
Caleb Anderson invites you to visit Find This Online an online resource guide that offers a variety or diversity of articles written on different subjects. Offering you relevant information and details that you are looking for. Browse through plenty of useful articles, information, content and resources on the subject. Visit us at Here for more articles on accounting.
,How Good Cash Flow Management Can Help Your Business
How Good Cash Flow Management Can Help Your BusinessBy Helen Cox
For a business, whether they are a start up business or an established business cash acts as their lifeline; it is the one aspect that allows a business to survive. The amount of cash that a business has at its disposal often demonstrates the health of a business. A business, especially a start-up business would be able to survive for a while without sales or profit however without cash it will fail.
In order to give your business the greatest possible odds you need to have sufficient control over the cash flow that is going into and out of your business. You obviously want to have more cash going into your business than out of your business however to ensure that this is the case you need to have a good grasp of the cashflow that your business has. You need to have a good idea of your cashflow if you are thinking about expanding or if you wish to borrow some extra money. To aid this estimate of your cashflow it is a good idea to keep your receipts as they will demonstrate examples of some of your expenditure.
An important aspect to remember is that there is a difference between cash and profit. In order for a business to make a profit it needs to produce and deliver goods or services to customers before you actually make a profit so if you don't have the cash to do this then you technically won't have a business left to run. If you want more evidence of these just look at the facts; the reason that most businesses fail is poor cash management that has led to a business not being able to afford to carry on and poor cash flow is the reason that the majority of start-up businesses don't make it past their first year.
Some examples of the cashflow that will be coming into your business include the following:
• The payment for goods/services from your customers • Anybank loans that you may have taken out • The interest that you collect on savings and investments • An increased bank overdraft or loan
Some examples of the cash that will be coming out of your business include the following:
• The purchase of any stock, raw materials or tools that your business needs • Your staff wages, property rent and all of your daily operating expenses • Any repayments of loans that your business may have • Any dividend payments • Income tax, corporation tax, VAT and other taxes • Reduced overdraft facilities
In order to have a good cashflow within your business you need to ensure that your pattern of income and your business spending habits allows you to have cash available as well as being able to pay the bills on time. Cashflow depends on the timing and amounts of money flowing into and out of the business each week and month.
In order to help you with your cashflow management it is a good idea to keep an up-to-date record of all of your cash so that you can see precisely what is coming in and going out of your business. By doing this you can find ways of potentially improving the cashflow of your business.
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,Cash Flow Statements and Why We Need Them
Cash Flow Statements and Why We Need ThemBy Joseph Devine
A cash flow statement is the motor oil for any business finance engine. It measures the amounts of money that come into a company and out of it over a given time period. This way a company is able to keep track of how much cash it has on hand to pay expenses and buy assets.
Some people might confuse a cash flow statement with an income statement. An income statement only measures whether or not the company made a profit, whereas a cash flow statement can tell you whether or not the company generated c ash during the time period. These concepts may seem a bit confusing. Just because a company has generated cash does mean that it has generated profit and vice versa. Cash flow statements work particularly with cash where as income statement s may also deal with assets.
Cash flow statements use information from both income statements and balance sheets. Using this information, the cash flow statement will reveal the net increase or decrease in cash for the period. Most cash flow statements are divided into three separate activities: operating activities, investing activities, and financing activities.
Operating Activities
Operating activities shows cash flow from net income to net losses to cash used in and for operation procedures. Sometimes, non- cash items are adjusted for any cash that was used or provided by utilizing other operating assets and liabilities.
InvestingActivities
Investing activities is usually the second part of a cash flow statement. This includes the purchases or sales of long-term assets, such as property, equipment, and even stocks. These actions are still represented as " cash in" or " cash out" depending on what is purchased.
Financing Activities
This is the third part of the cash flow statement. And, as the name might suggest, the financing activities section tracks financing activities. For large companies this includes money raised by issuing stock in the company, or borrowing many from banks. Paying back these loans are also considered under this section of the cash flow statement.
Financial health is probably the first step toward living a full life. And part of becoming financially healthy is becoming financially literate. Many people claim that money isn't important, but, though it cannot buy you love, happiness, or provide you with the most precious and valuable things in life, it can certain give you one less thing to worry about. For more information, visit http://www.businessdirectoryforyou.com
Joseph Devine