Strategies for Business Success
Success Strategy One: Effective Cash Management
Cash Management
This element of business operation is so important that all businesses should practice it 365 days of every year. Cash management is essential to optimize profit. If the cash flows of a business are not managed diligently, the effects of interest primarily, but a range of other negative influences will be unnecessarily large and in most cases seriously if not terminally damaging. Cash management is a KEY executive task. Identified below therefore are all the essential ingredients of effective cash management.
- A detailed monthly cash flow / budget (Some businesses will produce these even more regularly). Monthly should be regarded as the absolute maximum cycle.
- You must ensure your customers pay promptly.
- You must vigorously control the amount of money tied up in stock and work in progress.
- Ensure that the business overhead costs are affordable.
- Ensure that adequate and appropriate finance facilities are in place.
- Ensure you conduct regular monitoring of actual business performance against the cash flows and budgets.
- Ensure regular and meaningful dialogue is practiced with the key people representing your Suppliers and Financiers.
Your primary executive focus therefore is to ensure that each of these cash management fundamentals is practiced regularly and diligently. Each of the elements in turn will be expanded upon in latter articles. It will be clear we are not talking rocket science, and in keeping with the theme of these posts, simplicity both for the understanding of and for their implementing will remain the essential during the series.
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Success Strategy two: Cash Flows and Budgets
Continuing the series on Winning Strategies for Business Success this post covers monthly cash flows and budgets in some detail.
Producing a monthly cash flow and budget document simply means you are detailing your annual sales, together with your operation costs and capital expenditure on a monthly basis: The objective being to create a management tool to enable accurate tracking and critical analysis of all monthly fluctuations and variations to your annual budget. This strategy is critical for long term business success. The sooner management is aware of any negative trends in business the sooner corrective or remedial action can be taken. Alternatively positive trends may give indication of profitable opportunity emerging that can be immediately advantaged.
This monthly analysis is also referred to as budget phasing: It is particularly vital in best management practice to calendar sales on a monthly basis as accurately as possible. Nearly every business experiences seasonal sales fluctuations that can be caused by a number of reasons. Knowing your business means these factors can and must be taken into account in your monthly budget appraisal.
Fortunately your business history can provide a very reliable guide for more accurate budgeted phasing of sales. Here are some tips.
Calculate the percentage of annual sales that took place in each month of the previous three years. Any pattern that emerges will provide a reasonably accurate guide as to what may be expected in the current period. Reasonable variations to these may give notice of a problem or an opportunity that will need to be investigated. Now do the same exercise with the annual profit budget to know monthly whether or not the business is on course to achievement or otherwise.
You will notice the emphasis is on monthly analysis and this is for good reason. Quarterly or longer periods just will not provide you with a sufficiently early warning of an adverse trend or of a potential profit shortfall. The sooner you become aware of trends the sooner you can take remedial or other action, a critical strategy for business success.
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Success Strategy Three: Effective Debtor Management (1) The Process
Debtor Management
Continuing on the subject of winning strategies for business success, prompt payment discounts in theory may appear to be a good debtor management tool. You offer your customers a discount in return for their prompt payment of your invoices.
Let us look at this in more depth namely what the risks, costs and benefits are: For example you offer a 2.5% discount for payment within seven to ten days of the invoice date and as a result of this your customers pay two months earlier. This is actually the equivalent to paying interest at 15% per annum on the value of all the invoices you issue with the incentive, and may appear to be and probably is a reasonable cost compared to the alternative of having a correspondingly large financing facility.
However if as a result of your 2.5% prompt payment discount your customer only pays one month earlier, the interest cost per annum doubles to 30%. Now you will see that this is becoming very expensive. What is even worse, and this will be particularly noticeable with your larger customers, your invoice will be paid after one month but the discount will still be deducted, making the real cost of your incentive even higher.
Faced with the situation of confronting the debtor and demanding the correct payment too many managers, afraid at risking upsetting these important customers, will just accept the short paid invoice. You have actually become banker by default to these customers and you are providing them with free credit. The larger the value of the invoice, the greater the real corresponding cost to your business will be.
I think you will agree, if you are allowing this practice in your business, it is very far removed from effective debtor management.
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Success Strategy Four: Inventory and Work in Progress
Heating and lighting of your premises.
Storage space, equipment and mechanical stock handling.
Damage and theft.
Interest charges on any finance required.
All occupancy costs, rent, rates and other premises service and utility charges.
To control this huge cost requires that management focus on making the production cycle from raw material into finished product for sale as short as possible. One way this can be achieved is the putting in place of just in time inventory management. Once considered the sole preserve of larger companies it is stressed that this is not so. If you own a small to medium manufacturing business introducing this one technique alone will save your business thousands of dollars a year and make a very significant contribution to your bottom line.
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