Cash Flow And Debtors
Managing your cash flow and debtors should be a key priority with running your business. Poorly managed cash flow and debtors can result in a lot of peaks and troughs where there are times your cash flow is very high yet at other times it can be too low.
What is important with managing your cash flow is to ensure you have enough cash to pay your accounts as they fall due. This does not necessarily mean your cash flow should be even throughout the year but ideally it should match your requirements.
For example, with Christmas coming up you may see a significant increase in sales that will result in an increased cash flow in December and January, but you may have needed to purchase in October or November. That means you may have had significant cash outflows before you receive the income from the sales one or two months later.
As you prepare your cash flow budget for the year these are the issues you need to factor in to your plans.
Another important issue is managing your debtors. Once you have performed the service or made the sale you should send out the invoice. A lot of businesses wait until the end of the month but if you are operating on 7 or 14 day terms then that may not be practical. You could be waiting up to 6 weeks to be paid!
If you can, try to match the terms of your suppliers. If a majority of your suppliers operate on 14 day terms then you should also operate on 14 day terms. If for example you were to operate on 30 day terms you could face the prospect of a cash short fall and encounter solvency issues.
This shows how important it is to have a strong set of debtor management procedures in place. Be clear about your terms of trade, make sure the invoice is sent out at the completion of the job and once the debt is overdue follow up immediately.
This highlights the value of actively managing your cash flow and debtors to provide more certainty with planning for the future growth of your business.