Tip 9. Cash Is King
No doubt you've heard "cash is king" before, but what does it really mean? Cash itself has very little actual value. That is, the notes and coins are generally worth less than the intrinsic value of the currency (the paper of the note or metal in the coin). Despite its actual value, cash has a high perceived value. This stems from the government setting and underwriting the value of each note and coin (you can tell this by a government representative's signature on each note). The public gains confidence from this guarantee and readily accepts cash as payment for debts owing. I like to think of cash as the lowest common denominator in a transaction. I enjoy asking what's the cash price, as this is usually lower than all other prices. Cash is the best bargaining tool, that's why it's king. The quickest way to go out of business is to run out of cash. People usually demand payment in cash and if you can't pay then you have to either borrow money or sell assets quickly (at their cash price). If you stopped receiving cash tomorrow how long would you survive? If it's less than three months then your business has cash flow management problems. Preparing a cash management strategy is a great way you monitor and control the cash you receive, spend and invest. It generally has the following components:
Bank reconciliationHave you ever received a bank statement and thought you had more money in the account? Bank reconciliations help explain why. The differences are probably a combination of:
The longer you go without reconciling your bank account the harder the reconciliation process becomes. It may seem like a chore but: a properly balanced bank account will save you a fortune in accounting fees. One of the first things your accountant will do when preparing your annual accounts is reconcile your bank statements. This is generally a very labor-intensive task and could cost a lot of money. If you can't or don’t want to do it then hire a contract bookkeeper - it will usually be cheaper than getting your accountant to do it. Completing your bank reconciliation is a great way to begin or enhance your financial intelligence. Daily Cash ReportingAlways start the day knowing how much money is in the bank. I recommend receiving a daily summary of cash to keep track of how much money you have received and in what format (cash, credit card, electronic funds transfer etc.). I like to keep up to date and know who is paying me. Every day you bank more than you spend improves your cash position. Monitoring Your Cash CycleYour cash cycle is your business lifeblood. It's calculated as the sum of the number of days it takes to buy goods, sell them, collect the sale proceeds and pay the debt. A simple rule is to collect more money from your trade debtors (people who you have sold to on credit), than you pay to people who provide you with credit (your trade creditors). If you pay your creditors before you get paid from your debtors, then you would usually fund this with an overdraft account, other loan finance or from savings. The minimum you should aim for is to pay your creditors at the same time you receive money from your debtors. How do you monitor your cash cycle? Analysis
Investing Spare CashThe final component to your cash management system is to invest your spare cash. Don't leave it in a low interest bearing account. Have your money working for you all the time, even if it's only for one week. Steps For Immediate Results
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