If you were to do business in an ideal world, you’d probably like to have a cash inflow (a cash sale) occur every time you experience a cash outflow (pay an expense). But we all know too well that business takes place in the real world, and things just don’t happen like that. If you speak to experienced financial managers and financial directors, they will tell you that a healthy cash conversion cycle is an essential part of any successful business. A healthy cash flow and an effective cash conversion cycle is even more important than your business’s ability to deliver its goods or services or achieving revenue targets. The trick is to know how to use your cash conversion cycle to your business’s advantage.
Understanding cash conversion cycles is the first step in effectively managing your cash flow
There’s more to it than just a fancy term for the movement of cash in and out of the company’s bank account. If you do not have a solid background in finance or accounting, a lack of understanding of cash flow cycles may very well damage your business. Always consult a qualified and experienced financial manager or financial director. If you do not employ or don’t need a full time Financial Director or Financial Manager, consider consulting companies that outsource excellent Financial Managers and Financial Directors on a part time or Interim basis. They can assist business owners who don’t know how to use their cash conversion cycle to their business’s advantage.
Here are a few factors you may want to consider in finding ways to use your cash conversion cycle to your business’s advantage: (As stated above it is essential that you consult with an expert who has experience with setting up and managing cash conversion cycles)
1. Analyse your cash flow
By performing a proper cash flow analysis, you will be able to identify problem areas in the cash flow cycle of your business. As in any good analysis, you need to look individually at each of the important components that make up the cash flow cycle to determine if it’s a problem area or not.
2. Developing a cash flow budget
Your cash flow budget provides a good way of predicting your business’s cash flow for the next month, six months or even the next year. The cash flow budget really is the road map for the business and should always be referenced.
3. Improve your cash flow
By improving your cash flow you will, without a doubt, make your business more successful. Accelerating your cash inflows and delaying your cash outflows are key factors for improving and managing your cash flow. The cash flow budget is also a handy tool to use in the improvement and management of your cash flow.
4. Manage cash surpluses
Managing cash surpluses is just as important as the management of money in and out of your cash flow cycle. With the proper management of your cash flow, you will find yourself with a little extra cash, on which you can earn substantial investment income.
5. Know the difference between cash flow and profit
Your profit is not the same as your cash flow. It’s possible to show a healthy profit at the end of the year, and yet face a significant money squeeze at various points during the year. Knowing how to manage and plan for these cycles is critical to your business success.
With the challenging business landscape in South Africa, entrepreneurs and SMEs need to make their money work harder for them. That is why it makes sense to engage with a part time financial resource, such as a part time financial manager, to help you with understanding and managing your cash conversion cycle.