Conserving cash is absolutely vital to keeping your business alive.
This creates a very real necessity to closely manage the ins and outflow of your cash.
Now, it's important to know that the heart of cash flow management is actually the money cycle in your business.
Many trade business owners believe that the money cycle starts and ends once a sale is made.
But here is the hidden truth...
This is only really the beginning.
A sale ends ONLY once money exchanges hands, see below:
1. A sale is made
2. The product/service is delivered
3. An invoice is sent
4. The invoice is paid
5. Cash is deposited into accounts
In a perfect world, this money cycle works seamlessly…
In the real world however, problems can arise at every step!
Because of this, how well your money cycle works, is largely dependent on how well you manage every step of the process.
A lot of people who run trade businesses mistakenly think that the only way to improve cash flow is to influence step one, that is, selling more.
The problem is however, locking in more sales revenue and having it turn up on your profit and loss statement doesn’t automatically dump more cash into your bank account…
There are so many different factors that influence how, when and if that revenue EVER converts into cash, and ALL of those factors come into play AFTER step one!
Credit extensions, actually invoicing, invoicing policies, payable policy, dealing with customers, chasing debtors, negotiating with suppliers, banks and internal staff etc. are all just some of the management disciplines that have a direct impact on the money cycle.
If each step of the cycle is handled well, your business can achieve optimal cash flow.
And, sustainable cash flow dramatically reduces the pressure to increase sales (which like we have said, is not actually a solution) or borrow from outside sources (banks etc.).
If your cash is poorly managed, however, or, as is often the case, simply ignored, then the business is guaranteed to suffer from cash deficit, and all of the consequences associated.
If you're an electrician, plumber, painter, carpenter, or any other trade business owner who is looking for an accountant who actually cares about your business - click here to learn more!
