While profit and turnover are important measures of business performance but the main focus must shift to cash when times are as tough as they are at the start of 2011 and several businesses are finding themselves in troubles.
The most immediate indicator of the way a business is performing will be cash flow and it can also provide a warning signal that action needs to be delivered to prevent a slide into financial distress.
Close attention to cash flow should give a clearer picture of the immediate condition of the business but while it might be possible to adjust to strengthen incomings against outgoings this is only going to become a holding operation.
The business must also look at its business plan and business structure, preferably with the help of a turnaround adviser. An objective outsider working as part of the business team to secure its medium plus longer term future may identify fundamental weaknesses that undermine the ability to manage cash flow.
The first step in managing money is to construct a 13-week cash flow forecast to help identify risks plus actions that can be taken to reduce them. It should include income from product sales and other receipts and outgoings, each to ongoing obligations such as lease wages and finance and to lenders.
The business also needs to control cash every day, with payments made on a priority basis with purchases approved by an authorised person who is aware of their impact on cash flow. This will avoid the risk associated with returned cheques. It is also advisable for the business to talk to the bank and keep it aware of what is being done to keep things under control.
If the forecast will be showing that there is a mismatch within the timing of money coming in and fixed amounts that have to be paid out (such as leases for buildings and equipment, wages and supplies) the money flow forecast will show where the problems are and suggest exactly what needs to be tackled and the order in which to do so.
For example , a business may have long-standing customers who are themselves facing issues and for the sake of retaining their business may have been allowed additional time to pay invoices. Action is needed, nevertheless , if this is beginning to push the business towards insolvency. It may be that an agreement can be made with the customers to pay exceptional invoices in small amounts over an agreed period, which will keep at least some cash coming in and preserve the relationship with all the customer.
In the same way, the company must handle payments against receipts by prioritising them and paying out of cash received in order of priority. Concern payments will be needed to keep the business going such as purchasing materials where suppliers are often on stop.
The particular intensity level of cash management depends on how severe the cash flow scenario is. Steps should be taken to enhance cash flow by looking at prices, staffing, overheads and all other costs to consider whether there are cost savings that can be made. Does the company really need three fork lift trucks or can it handle with two or even one, for example. Is it possible to renegotiate payments and prices with suppliers or reduce the volume of supplies ordered? It is in their passions to negotiate since they too will want to survive and retain business. It might be that they will accept a rearrangement of, say, quarterly payments to monthly payments to keep things under control.
Similarly, are all the staff fully occupied? Otherwise, and they are valuable people the business does not want to lose, it may be worth cutting overtime or negotiating reduced hrs or reduced wages. If individuals feel included in the decision making and are most working together to help the company survive contracts can be reached that will help the cash flow situation in the immediate future whilst also protecting the longer term long term.
Tight control of cash coupled with a comprehensive look at the business model and a realistic company plan will go a long way to help a company survive in difficult trading conditions
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