I have mentioned before that, in business, Cash is King!
To survive in business, you must have a handle on your cashflow and disciplined processes to control it. Not only do you need to improve your cashflow for Inflows, you need to also control the cashflow in regards to ‘Outflows’. Maintaining control on where and how the cash goes out in business is just as important as where and how much cash comes into your business. If you don’t have a handle on your cash Outflows, it won’t matter how much revenue the business brings in… you can potentially cripple a business by spending without discipline.
The first step is to classify your expenses – Fixed and Variable.
Fixed expenses are those that do not vary with Sales e.g. rent, utilities (office), loan payments, municipal taxes, accounting fees, car expenses, etc. Variable expenses are those that very with sales e.g. cost of materials in manufacturing, direct labour costs, commission payments, variable utilities (manufacturing), sales taxes, etc.
It is critical that you establish a budget for your expenses. Without this you cannot Test and Measure your progress (or lack thereof) of cost control.
Fixed expenses need to be negotiated up front and monitored vs. budgeted. Key areas to watch include phone costs and office supplies. Utilities costs can also bleed profits – turn off the lights and computers at night! Know your Breakeven $Sales. (Fixed Costs/Gross Margin %)
Variable expense control includes negotiating better deals for raw materials, strict control of overtime wages and constant improvement in waste elimination and efficiency – ask your employees for help here!
Trade Accounts Payable
This is a standard form of business financing. Suppliers who grant you 30 day terms effectively loan you money to buy their products at 0% interest rate. Prudent use of credit cards can get you up to 55 days of 0% financing – but make sure you pay on time.(Many cards will also give you reward points toward that vacation you’re going to take! However, please check with your accountant and government policies on reward point usage with your company.) You can generally stretch payments a few days however be careful – your credit rating is important, so don’t abuse this process.
Having firm control of your company’s finances, including Inflows and Outflows is critical to the success and growth of any business. Take the time to know your numbers, and track them regularly.