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Cash might be king, but cashflow is what keeps a business running.
Learning to manage cashflow is an important art to master when running your own business, says Clarc Morris, Area Manager for Kiwibank’s Whangarei Business Banking Centre.
It’s a lesson that his customer Emily Bennett, of family-run chocolate business Bennetts of Mangawhai, has absorbed over the last couple of decades as she watched her parents, Clayton and Mary Bennett, build their dream from a two-person operation into a thriving business that employs more than 40 people.
“Cashflow is one of the essential elements to your business running smoothly,” says Emily. “Early on it allows for expenses and wages to be paid, and in the longer term it fuels growth and development.”
Emily runs the company’s chocolate factory – something she admits is pretty much a dream job – and also looks after the books. Clarc is the company’s Kiwibank business banking manager. Here, they share their top tips for keeping on top of your cashflow.
“Until your business can afford to spend, just purchase what is essential at the time,” says Emily. “Make sure you’re getting good deals, and if not look for cheaper alternatives.”
To understand your cashflow position, you need to know what your costs are and stay on top of them, says Clarc. “Check regularly that your costs are at expected levels, that they are necessary to your business and that you aren’t paying for things you don’t need.”
Don’t confuse profit and cashflow. The profit figure on your profit and loss (P and L) sheet is not your cash on hand and it doesn’t represent your cash position. Lots of other components feed into getting a true picture of your cashflow, including debtor and creditor positions, stock on hand, capital purchases and principal costs. “Smart cash-flow management requires a laser focus on each of these drivers of cash, in addition to your profit or loss,” says Clarc.
Clarc says a big cashflow mistake is using cash to buy a major long-term asset, instead of getting financing. “Funding big purchases through cash may mean a business could end up short of cash if there is a sudden revenue shortfall or rapid growth.”
If you have equipment or stock you’re not using (and won’t use in the foreseeable future) sell it, says Emily. “There’s no point hanging onto things that are depreciating. It’s far more beneficial to have the cash available.”
Debtors and creditors will have a strong impact on your cash position, so don’t be shy about talking to them and negotiating terms that will work for both of you, says Clarc. “Negotiating for things like extended terms with your creditors can help with cash flow management, as can improving the time frame in which debtor payments are received, whether this be by shorter terms or requesting deposits etc.”
Forecasts provide a focus on cashflow going forward and can help you understand what the pain points are for your business. “However, this is only of use if it is a working document and is kept up-to-date and reviewed regularly,” says Clarc. “Use the projection to anticipate slow periods and plan in advance what to do about them.”
Emily says modern accounting software is an easy way to keep track of the money going in and out of your business accounts. “You can sync the software with your bank accounts and get easy to read reports.”
Finally, don’t be afraid to ask for advice. Your banker will have dealt with all sorts of business scenarios and complexities, so tap into his or her knowledge and expertise.