CASH IS KING: UNDERSTANDING AND MANAGING YOUR CASH FLOW
Many businesses grapple with cash and cash flow, those that have enough cash have a challenge managing and optimizing it, and those that don’t have enough struggle with raising enough to work with. Whichever side of the equation you lay and or if you are among the lucky ones with enough money, your finances will not work for you unless you make them work.
Making your finances work has been encapsulated in an analogy; if your business is your body, cash represents blood and your assets are your muscles. For your business to keep moving its “blood” has to circulate and it is this circulation that determines how well your business will grow.
What is cash flow and why is it important for your business?
The term cash flow refers to the net amount of cash and cash equivalents being transferred in and out of a business and this availability and circulation of money have a great impact on the survival of a business. Before we start spending it is important that we have a plan; know what our needs are, which ones to prioritize, and how our expenditures and investments affect our cash flow and ability to meet our business obligations.
Using records, historical data, forecasting, and budgeting, you should be able to budget and plan your expenditure with critical questions centred around how much money you have, whether is it enough for your working capital, what needs to be done, is your expenditure generating profit, what are your profit margins and what is your cash turnaround time among other questions. These questions force you to look at your cash in terms of its potential and opportunity cost of spending on X as opposed to Y and by answering these questions you can plan and forecast your cash flow in a way your business remains liquid and profitable.
How do you manage your cash flow cycle?
As with all business decisions, you must have a plan based on the answers to the above questions. In addition, you must also understand some financial terms and ratios key among which is your ability to distinguish between working capital and profits. The former represents cash available for delivering on your operations while the latter is the margins made after conducting business.
Thus armed with a plan, decisions like how much to spend, amount of credit to extend, terms of credit you seek from your suppliers, items to buy or campaigns to pursue, inflows and outflows, and profit margins become clear and every astute business person needs to review these numbers daily, weekly or monthly. It is through reviewing that we can capture trends, flag challenges, or plan for opportunities while also preparing for volatile times we may encounter as a business.
Indeed as you can all see, it does not come together by magic, rather ensuring your money works best for your business is a result of very deliberate planning, record keeping, data interpretation, and forecasting. Further good financial discipline comes to play especially your ability to separate personal and business accounts, working capital from profits, and paying taxes and debts. On the other hand, being able to keep track of what you are owed, collecting when due, and reducing the payment cycle also helps your cash flow as you can reinvest the collectables back into your business.
It is safe to say that without financial discipline, all other efforts become futile and or expensive as you may end up borrowing and using expensive finance that eats into your profit margins.
Should you wish to learn how best to manage your finances and plan around them, look no further than our financial institution. We offer advice to our customers and the community we have built around us because we understand when you grow, we grow. We also offer various loan products such as Business Loan, Emergency Loan, Asset Financing, Salaried Loan, Loan against Logbook, Import Duty Financing or Title Deed Loan, to help grow and manage all operations. Contact us today at 0700 944 444 or WhatsApp us through the button below, or email us at info@springboardcapital.co.ke.
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Article based on Henry Ndung’u Webinar Presentation – Henry is a Finance and Business Development Board Director at Springboard Capital. He also holds directorships in various companies in the energy and logistics sector, as well as practices business and family advisory.
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