It is important to plan for a cash shortage. There are some important things to consider when it comes to cash flow management. If you have your eye on them, chances are, you will be able to manage through the rough patches and secure a long-term future for your business.
Be aware that profit is not the same as cash. You can be showing great results in terms of net profit, but if you fail to pull your cash in from your customers on time, or if you give them too much credit, you will be crippling your own business. We all need cash to roll in constantly to make the wheels go around.
Cash Gap – the big killer
Have a look at your «cash gap». This is the number of days between paying out for something and receiving money in for that same thing. If you are a shop, you buy goods and likely pay for them before you sell them. If you are a consulting company, you book hours and likely pay for your team before you invoice your client. Shorten the gap!
We need to aim to keep these cash gaps tight and short, as the gap represents all the money that is NOT in our bank account. When our money is out in other people’s hands it is a stressor and a risk. The longer the money is not in your bank the bigger the risk it will never arrive. That is called Sods law!
‘Gap’ is one of the major killers in SMEs, you can shorten it by making sure that you are getting nice long payment terms from your suppliers, and not being too generous with allowing your customer’s long terms, instead of 45 days, offer them 30, or better still 15. Try and get the money into your bank before you pay it out.
Never take your eyes off your cashflow – without it your business will die.