“Cash is king”, the saying goes. Without it a business cannot pay its bills and will go out of business. Generating cash is not the same as generating profit. Profit is the difference between what it costs to produce and the sale price. Profit does not take account of timing. For example, you could pay to produce something, but not sell it for a year. During that time there is a debt. The debt would show as a negative cash balance in the accounts. While cash is negative, you cannot invest in growing the business, unless you can secure a loan.
When most businesses start out the they cannot get loans until they have a track record. To get a good track record, you need to be on top of the cash. The following 7 tips should be considered by any new business:
Pay your self in arrears and with the longest interval possible. You and the business are separate entities. If you pay your self at the end of the month, the business has the use of the cash during that period.
Get customers to pay as quickly as possible. Agree 7-day payments and not 30 days. It gets the money into your account sooner.
If possible, get customers to make payments in advance, if not for everything, a sizable deposit.
Arrange credit on suppliers or have a business credit card. Payments go out later, and you retain the cash for longer.
Be efficient in all your operations, waste costs money. Time is money so keep an eye on this as well.
Raise prices as much as you can. Price increases have a big impact upon profit. Far more than increasing turnover.
Only when you have done all the above consider Increasing production but try and keep the overhead the same.
If you need to reset your thoughts on generating cash, then please contact me for a no obligation meeting. If you have done all the tips above and you are still running out of cash, I have a more fact sheets, which explains more complex way of generating cash or clearing bad debts. Peter.Searle@ba4cs.co.uk
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