You may have heard the saying – “Turnover is vanity, profit is sanity but cash is king”
How true that is – if you are running a business the most important thing to keep a handle on is cash – even very profitable businesses can fail if they run out of cash.
If you are in a manufacturing business you will need cash to operate (sometimes called working capital) to:
- Buy in raw materials
- Pay for labour and overheads to convert the raw materials into finished products
- Hold enough stock of finished product to give good delivery service to your customers
- Keep things going until your customer pays you
Here are a few simple things you should do to keep your cash under control:
- Produce a cash flow forecast;
- Project your best view of the way your business will run over the next 6-12 months;
- How much cash will you have to pay out each month?
- How much will you sell and invoice?
- When will your customers pay you?
- When will you need to pay your suppliers?
- How much stock do you need to hold?
This will show you month by month how much cash you have (or need to borrow) in your business and will give you a vital future view in good time to proactively manage your cash.
So what practical steps can you take to keep cash under control?
Measure it – as a good business owner you will know your cash position at any time – remember the old adage – “What gets measured gets managed”
- Creditors – How much you owe your suppliers
- Debtors – How much your customers owe you
- Stock – How much cash is tied up in product stock
- Bank – how much cash is in the business bank account
Balance it – Can you agree longer terms of payment to your suppliers and get your customers to pay you more quickly? This will depend on the type of business you are in but it is worth investigation. You could consider options to pay more to suppliers for longer payment terms and giving discount to your customers for prompt payment. This can make a big difference to the amount of cash tied up in your business. Supermarkets, for example, take payment from their customers at the till but take 30 days to pay their suppliers so they are very cash rich.