Managing cash and profit

The importance of managing cash and customers

Majority of businesses put their priority into making profit than managing cash with the view that profit is equal to generating cash for the business. However, the key surviving tool of a business is cash; a business needs cash to finance its activities, without cash the business will end.

It is important not to confuse cash with profit. Profit can turn into cash only if your customers pay and also bear in mind profit can turn into bad debt if your customers failed to pay and this equal to loss of cash.

Ideally, when you start trading, you will have more money coming in the business than money going out. This will allow you to build up cash in hands and at bank with which to you can pay your suppliers, staff and other fixed monthly expenditure on time.

In reality, suppliers always demand payments on time and customers often legging behind with their payments. You must balance up the inflow and outflow of cash in order to avoid strapped for cash.

There are ways to achieve healthy cash flow in your business.

1. Ask you customers to pay sooner
2. Shorter payment terms for customers
3. Chase debts (overdue payments) promptly and firmly
4. Use debt factoring companies to collect debts on your behalf
5. Ask for extended credit terms with suppliers
6. Better stock control and inventory by ordering less stock but more regular
7. Lease rather than buy equipment to avoid capital outlay

To monitor your cash balances, you need to update your bank accounts and cash accounts regularly and ideally set up a proper bookkeeping system that allows you to retrieve your records easily. You can use excel spreadsheet to record your business transactions or off-the-shelf bookkeeping software for this purpose.

Concise Accountancy - Cash is vital tool of business survival