How To Improve Your Cashflow #3

Available cash tends to get tied up in what is known as the working capital cycle (WCC). Every business, regardless of what they do, has a working capital cycle.

Imagine that the stock a business buys sits on the shelf, on average, for fifty five days before it is sold and that it takes an average of forty five days to collect the debtors. Each dollar tied up in the WCC takes one hundred days before it returns to the cash position where it can be used again to purchase more stock (refer diagram).

While waiting for that dollar to return, more stock has to be purchased to keep the business operating and to do so, many businesses use their overdraft facility which is costing them money.

If there is no overdraft, they are using their credit funds that could be better used elsewhere. The faster you can turn the WCC, the faster the dollar returns and the less overdraft or surplus funds you have to use. This is where efficiency in debt collection and improving your stock turnover is the key.

Keeping your records

It is critical that you keep good financial records in business. It doesn’t matter if they are paper based or on a computer software program but they need to be simple to understand, reliable and accurate. They need to be in a consistent format and designed to provide information on a timely basis.

These records will form the basis of your financial statements and tax returns. Your accountant can help you to determine what records you should keep and what information they should contain. In general you need to keep records of all transactions, accounts receivable, accounts payable, payroll, petty cash and inventory.

Don’t get swamped by data. Some people love to produce reports and it is then that it becomes all too much and easy to set aside. Ask your accountant what you need to measure in your type of business. Set yourself some key performance indicators and produce reports that make sense to you. Things that get measured get managed.