Good control of finance should always be a key element of your overall business management.
Here are some tips which should guide your decision making and business activity:
Cash is king! It is the ‘lifeblood’ of your business and needs to be managed very carefully.
There are lots of potential internal sources of cash which you should focus on before using bank finance:
- Sell as much for cash as possible
- Only give credit to established customers with good payment records. Customers who have been slow in paying should be converted to cash or direct debit; slow payers could quickly become bad debts. Only give credit to new customers if you can check their credit ratings
- Ensure that credit terms given to your customers are complied with. To help with this;
- Make sure that invoices and statements are sent out promptly (even the best customer will not pay if they haven’t been billed!)
- Follow up any overdue accounts as soon as the payment date has passed ….don’t let it drag on. Phone them and/or call to their premises to collect payment. Those who pressurise most get paid first.
- Try to negotiate better terms with your suppliers but don’t overstretch them as you might then be forced to be a cash or direct debit customer
- Minimise the amount of cash tied up in stock:
- Try to schedule your production or purchasing to meet known or fairly certain demand
- Reduce, if possible, the range of items held in stock
- Identify slow moving items and sell them off at a discount for cash. Don’t replace them.
- Postpone non essential investment in new equipment/motor vehicles etc. Improve your maintenance of existing equipment
- Do regular cash flow projections and try to schedule supplier and other payments to coincide with expected cash inflows
In the current environment there is huge pressure to reduce prices:
3. Control Systems
- Offer additional products/services rather than reducing prices e.g. one free with every 10 etc. This is an effective price reduction but it keeps your unit price intact.
- If you have to reduce prices make sure that you know what your relevant costs are.
- Differentiate between fixed and variable costs
- At a minimum you should get a price that covers variable costs and makes a ‘contribution’ to overheads
- If you have to give a ‘special’ price for a large order try to confine it to ‘own brand’ products to avoid ‘cannibalising’ branded products and prices
- If you have to give extra product and/or reduce prices try to get your suppliers to make an appropriate contribution
At all times, it is important to retain strict control of your finances and ensure that you have robust systems in place:
- Control and track all expenditure to stay within budget: be sure to keep good records and use timely accounting systems / packages and internal systems that preempt payment
- Manage your stock levels by producing sales forecasts
- Ensure any risk exposures are well covered by rigorous procurement systems and expense checks
- Keep planning ahead to avoid any shocks