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What’s the most crucial financial factor when it comes to your company’s success?
Revenue growth? Profit margins? Net income?
These figures are the most obvious indicators of success. And it can be intuitive for us to look at these numbers when planning the way forward.
But these numbers are just indicators of a financially well-managed company – they’re the result of your efforts. They shouldn’t be the metric you use to guide the company towards financial success.
To achieve future success, you need to focus on the present and evaluate the cause and effect that gets you the results.
From a finance perspective, a healthy and consistently positive cash flow is one of the most important factors which contribute significantly to a successful company.
Cash flow is like the blood supply of your business. With a low supply, your business will get into trouble.
A surplus allows us to capitalise on opportunities and fuel sustainable growth. It makes the difference between success and failure. So how do you generate healthy cash flow for your company? Here are 3 effective ways to create a Healthy Cash Flow in your company.
Gentle reminders can help you get payments quicker.
As the old saying goes, it’s not a sale until the money is in the bank.
Old, but true. If your customer doesn’t pay you, there’s a risk of being paid slowly, or even turning into bad debt.
Don’t fall into the trap of merely looking at your top-line sales. If you can only collect 50% of all your revenues, then the top-line sales are only half relevant.
Chances are, the more delayed the receivable, the less likely you’ll get paid. So you’ll want to make sure that you consistently get payments as fast as possible. Ensure that you convert your products and services to cash as quickly as possible.
But not all your customers will miraculously pay on time. Managing your receivables requires a systematic process. With a good system in place and a little bit of tact with your customers, you can improve your cash flow situation.
Making sure you're minimising your cash outlays is another important step on the way to a healthier cash flow.
We often relate sales and growth. But that’s an oversimplification of growth.
In chasing sales growth, you might incur more expenses to achieve more revenues – for example, marketing cost and commissions.
From a revenue, cost and profit standpoint, the margins might look healthy.
But, when your expenses flow out much faster than the inflow we collect from your customers, you’ve a problem.
Effectively managing your payables is as important as managing your receivables. They’re two sides of the same coin after all.
We’ve touched on two areas of efficient cash flow management:
But establishing these processes are just the first step. A process is only as good as the way it is being managed and monitored.
Without a system in place, even the best process can fall apart -and quickly undo all your efforts and careful planning. You’ll need a system in place to achieve long-term healthy cash flows.
An enterprise resource planning (ERP) system can help you manage your cash flow process more effectively. Here’s why:
An ERP system can be pivotal to supporting and maintaining your cash flow processes.
It can support proper cash flow management, and proper cash flow management turns into healthy cash flows.
A healthy cash flow means that your company has options in both good and bad times.
During the good times, you’ll be better positioned to capitalise on new opportunities. With proper cash flow management, you’ve the cash to fund R&D, develop a new product, make strategic acquisitions, or start a new venture.
In bad times, you’ll need time to strategise, regroup, plan and navigate through the business landscape. A healthy cash flow gives you valuable time to look for a solution while helping your company tide through difficult situations.
Having options can make the difference between success and failure. To have these options at our disposal, we need to build healthy cash flows by managing and monitoring it consistently.
Cash flow issues arise not because of failed finance managers, but due to their failed processes and systems.
Thankfully, these systems are not difficult to implement; it just takes thought, tact and applying technology in the right areas.
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