The entrepreneur needs to know what is happening in his bank account at all times
At the time of launching the business and whilst preparing the annual budget, the funding required for the various parts of the business should have been determined.
This would have included the long- term funding of assets such as computers, plant and equipment, buildings etc. which, if funded, are normally paid off on a once a month basis.
At the same time, the payment arrangements for the operational or trading side of the business will have been put in place. This could be by way of an overdraft or be self-funded.
It is an essential part of the business owners’ duties, to ensure that the business is operating within these funding constraints.
It should be noted that in most cases where funding has been obtained the business owner would have signed personal surety so should the business fail he or she would be liable to make good any such debt.
How to manage the funding of the operational and trading needs of your business
Operational Cash Flows
These are the revenues received less the operating expenses incurred in order to achieve those revenues. The level of revenues and expenses should have been determined in the budget and that budget forms the guideline as to what kind of profits we should be achieving.
We thus need to constantly monitor:
Sales are the lifeblood of any business. Use the budget to determine what your daily sales are going to be and check daily. The entrepreneur must also be aware of the extent of cash sales to credit sales.
2. Gross margin
This is the difference between the selling price and the cost of the item sold and must be high enough to cover the overhead expenses the business incurs monthly.
There are 2 elements here, one being the cost of sales and then the expenses such as salaries, rent, stationery etc.
Ensure positive cash flows
- Revenues must be greater than expenses. Once your revenues fall below a certain level your business will be using cash not generating cash
- A large part of your total expense bases consists of what we call fixed costs and are not affected by the level of revenue. An example would be:
- rent payable. You would have to pay your rent even if you made no sales.
Costs that vary depending on sales levels are known as
- variable costs – A good example of a variable cost would be the cost of
- commissions payable to salesman. I.e. the more the sales the more the commissions.
The second part of daily cash management is the
- Management of working capital which consists of :
- a) stock
- b) debtors
- c) creditors.
Any inefficiencies here could have a severe impact on cash flows.
You always need to monitor your stock levels, as stock that lies idle on your warehouse floor is costing money. Software that monitors your stock levels and determines your fast-moving items, as well as determines your optimum levels and reorder quantities, is essential to proper management.
Related: Smart Money For Small Businesses
You must have a credit policy which must be enforced. Make sure that you provide in your budget for nonpaying debtors, as some of your customers will not pay you on time if at all.
Set credit limits and enforce them. Stop supply if payments are not being made in time. It is never wise to be reliant on just one or two major customers. Management of your debtors is critical to the success of your business.
It is so important that you obtain the best possible terms from your suppliers. This is vital in businesses where the margins are tight and in industries where payment from customers is slow.
You must be careful to ensure that you do not pay your suppliers faster than you receive your cash from your debtors. Suppliers will try and entice you with settlement discounts, but this will not help if your customers (debtors) are taking too long to pay you.
The small business owner needs to pay attention to these areas to be successful. These are very basic guidelines on the management of cash and it is recommended that the small business owner research this topic further and customise to his own business.