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Guest Post – Keeping a Healthy Balance Between Capital and Cashflow

Capital. Every business needs it, especially small businesses. However it’s cash that keeps a business alive on an everyday basis. As the saying goes ‘turnover is vanity, profit is sanity, but cash is king’. If money is not available to keep the business ticking over from day-to-day it will collapse. An organisation that keeps a close eye on a healthy cash flow and restricts spending in terms of monthly turnover and profits will also have greater control over investment.

This article will help explain some of the simple techniques which will enable you, as a small business owner, to maintain a healthy balance between capital and cashflow.

The business manager – the juggler

Having too much cash available at any one time can starve the business of investment and growth. This is where you need to start juggling. If you keep too much money tied up in capital your cashflow will suffer and if you have too much cash for everyday business needs your enterprise is not benefiting potential investment.

Forecast into the future – not just next week

So let’s start from the beginning.  Future capital can be distilled from monitoring weekly and monthly cashflow. So, in order to remain safe you need to have a clear idea of where cash is going to be used. Only then can it be placed in long-term assets, business savings and investment schemes. You also need to be able to forecast into the future. OK, this month’s costs seem to be pretty easy to judge but how about next month or six months’ time? With the ever tightening recession and reduced business growth, is it likely costs will increase or decrease?

Controlling the unpredictable

Some factors at first seem hard to judge. For instance late payments can turn forecasted cashflow upside down in an instant and cause great problems. By tracking back over how previous payments were paid you can get a better idea of ‘patterns of payment’. Do certain clients have a habit of always paying late? Is it the same suppliers you have to chase month-on-month? Having this knowledge can give you a much better insight into how much ‘liquid cash’ you are going to need – it also acts as a ‘financial cushion’.

For more information on the trials and tribulations of late payments read this article.

Controlling cash is essential and management accountants deal with a range of cash issues:

  • ensuring that sufficient cash is available for investment by not tying up cash in stock unnecessarily
  • putting procedures in place for chasing up outstanding debts
  • controlling different levels of cash outflows in relation to the size of the business.

A finance system that takes your cash flow into account

Of course filtering money from cash flow is only one form of gaining future investment in your business. However the obvious example of is business loans but these continue to be difficult to access as the recession continues. While the Government have put various schemes in place to encourage banks and finance houses to lend, the business market are yet to see any real benefits. It’s always worth considering a business cash advance.

This post was contributed by Business Cash Advance, who offer a finance scheme that takes your cash flow into your account.

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