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Four tips for good cash flow management

In aristocratic England, there was no authority higher than the king. Wars were waged, murders were plotted, and huge betrayals took place as men sought that coveted title.

The word has retained some of its allure. In modern lexicon we use ‘king’ to denote the most important or iconic of its type: the lion is the ‘king’ of the jungle because he is at the top of the food chain; Elvis was the ‘king’ of rock ‘n roll because he paved the way for the genre; Michael Jackson was the ‘king’ of pop because he was incomparably popular in his field. If you’re awarded the title of king, it’s being used to suggest that you’re somehow at the top of the hierarchy.

So what do we make of the popular phrase: “cash is king”? The phrase, often thrown out in casual speech, suggests that there is nothing as important as having cash on hand. If we were to alter the saying for accuracy, we would go one step further and say “good cash flow management is king”.  When it comes to running your business, you may think that the most important thing is making sales. And indeed, sales are what will grow your company. But even if you have contracts lined up and huge deals in the bag, if your cash flow management is poor your company will not survive. Here are some tips for taking care of that ‘king’ of business principles – four ways to ensure good cash flow management.

  1. Offer discounts for early payment. Your local grocery store may offer a free item to the first 500 shoppers to buy a particular product. Their motive is to get cash flow moving, and it works! Use the same principle to incentivise your customers to pay early, for example, a 10% discount for those who pay COD, or a 5% discount if you pay within 10 days of invoice. Or, you could offer free delivery to those who pay immediately. The more reliant you are on that cash coming in timeously, the more generous you should be with your incentives.
  2. Admin, admin, admin. There are those who take great satisfaction in having all the invoices issued on time and the books balanced, and those who lose the invoices and follow up on payment in two months’ time. It’s worth making sure you find someone with the right personality to oversee your debtors’ books. Look for an admin fundi who is strong on organisation. She should issue invoices immediately and follow up on them promptly. Just putting those two processes in place will put your cash flow management on a firm footing.
  3. Ask for deposits where appropriate. An entrepreneur we know opened a very promising training business. He received a lot of interest for his first round of courses and was very excited at the number of people who had signed up. He paid for the training venue and food, and printed out all the training material. The day before the course, all except two of the attendees cancelled. He had already outlaid the money and had no way of recuperating it. His losses could have been mitigated by requiring a 50% deposit upfront from those who had committed to attend the course. And, no doubt, the cancellation rate would have been lower too.
  4. Structure payment requirements for big deals. If you’ve got a huge deal coming in, make sure you structure the payment terms a little differently from how you would normally. Require some payment upfront, and instalments throughout the project. Prudent cash flow management will ensure that you have enough money on hand to complete the project and pay salaries as you go. Whenever a project requires a large outlay from the business, it is not inappropriate to have the customer shoulder some of that burden.

Structuring payments well, staying on top of your invoice requirements, and incentivising early payments are just some ways in which you can ensure good cash flow management. If you need some help putting processes or systems in place, contact The Finance Team. One of our experienced financial executives can assist you on a part-time or ad hoc basis.

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