It's okay to Lose Everything but Not This in Your Business

I dare to claim that a healthy cash flow is even more important than your business's ability to deliver its goods or services! That may be placing a bit too much importance on your cash flow, but consider this: if you fail to satisfy a customer and lose that customer's business, you can always work harder to please the next customer. But if you fail to have enough cash to pay your suppliers, creditors, or your employees, you will be out of business!  

A healthy cash flow is an essential part of any successful business.  It is just like blood flow in your human body.  We know that if your blood is not flowing smoothly in your body, you will suffer stroke and eventually die.  Same as business.  If cash is not flowing smoothly in your business, your business will be stuck and eventually fail.

No doubt about it, proper management of your cash flow is a very important step in making your business successful.

So understanding cash flow is the first step in effectively managing your cash flow. There's more to it than just a fancy term for the movement of money into, and out of, your business checking account. 

But what is Cashflow?

In its simplest form, cash flow is the movement of money in and out of your business. It could be described as the process in which your business uses cash to generate goods or services for the sale to your customers, collects the cash from the sales, and then completes this cycle all over again.

Inflows:
Inflows are the movement of money into your cash flow. Inflows are most likely from the sale of your goods or services to your customers. If you extend credit to your customers and allow them to charge the sale of the goods or services to their account, then an inflow occurs as you collect on the customers' accounts. The proceeds from a bank loan are also a cash inflow.   Any advance payments from your customers, and receipts from the government (e.g. grants like SDF), plus any interest received are all cash inflows.

Outflows:
Outflows are the movement of money out of your business. Outflows are generally the result of paying for goods and services purchased and for expenses. If your business involves reselling goods, then your largest outflow is most likely to be for the purchase of inventory.  A manufacturing business's largest outflows will mostly likely be for the purchases of raw materials and other components needed for the manufacturing of the final product. Purchasing fixed assets, paying back loans, and paying accounts payable are also cash outflows.   Similarly, any advanced payments to suppliers, refunds to customers and interest payments are also cash outflows.

To properly manage your business's cash flow, you must first analyze the components that affect the timing of your cash inflows and cash outflows.  A good analysis of these components will point out problem areas that lead to cash flow gaps for your business. Narrowing, or even closing, cash flow gaps are the key to cash flow management.

There are 4 main areas where your business cashflow is stuck:

1. Accounts Receivable

Accounts receivable represent sales that have not yet been collected as cash. You sell your merchandise or services in exchange for a customer's promise to pay you at a certain time in the future. If your business normally extends credit to its customers, then the payment of accounts receivable is likely to be the single most important source of cash inflows. In the worst case scenario, unpaid accounts receivable will leave your business without the necessary cash to pay its own bills. More commonly, late-paying or slow-paying customers will create cash shortages, leaving your business without the cash necessary to cover its own cash outflow obligations.

Accounts receivable also represent an investment. That is, the money tied up in accounts receivable is not available for paying bills, paying back loans, or expanding your business. The payoff from an investment in accounts receivable doesn't occur until your customers pay their bills. The idea of accounts receivable as an investment is an important concept to understand if you wish to consider the impact of accounts receivable on your cash flow.

2.    Inventory

Inventory represents goods that you have purchased and are yet to be sold.  They are subject to obsolescence, damages, changes in fashion, and worse still, storage and interest financing cost!  So the first step in healthy cashflow is to have healthy inventory flow. 

You should not keep too much inventory, neither should you have too little inventory or you will lose out on sales.  Many years ago, the distributor of a top Japanese car lost out on many sales because you have to wait 3 months to get your car delivered from Japan!  This is a case of unhealthy cashflow due to no inventory! 

3.    Fixed Assets

Fixed assets are assets that you keep for use in the long term.  It is fixed and not subject to frequent changes in the short term.  The most common type of fixed assets is land and buildings, plant and machinery and equipment.  The cost of owing fixed assets is not just interest and installment but the risk of obsolesce and changes in fashion and trend.   If you have too much fixed assets, you will be busy servicing the installment payments every month.  To improve your business cashflow, rent instead of buying fixed assets.  Many businesses have sold their industrial building and rent from the buyer instead.  This brilliant move is called “sale and lease back” and is the fastest way to improve your business cashflow.

4.    Old Staff and Old Mindset

Many businesses are not moving forward because their staff are stuck with old mindset and refuse to innovate and move according to the times.  For example, many of them still wait for businesses to come to them instead of pro-actively looking for customers.  In fact this old mindset is the biggest area to make your cashflow stuck. Get rid of old staff and staff that refused to change or send them for training and coaching by professional business coaches and trainers.

So analyse your business cashflow properly and eliminate the above 4 main areas of gaps. Remember, healthy business needs healthy cashflow, and cashflow is more important than the business itself!   If you would like more information on this and other business topics, email to andy@asiacoachingtraining.com .

Based in Singapore, Andy Ng has, since 2001, been an international Business Coach and Trainer.  To-date, he has coached over 141 business enterprises on a one-to-one basis and trained over 9,751 people on a wide range of management and business topics.  His “Weekly Group Coaching”  programs are highly popular, and so are his “Friday and Wednesday afternoon” seminars.  Andy has appeared at MediaCorp’s 938Live! “Living Room” program, “Lunch Break at noon”, The Sunday Times, Lianhe Wan Bao and other magazines.  Visit www.asiatrainers.com or call him at 65-8201-4347 now.