The basic rule when it comes to business accounting is:
- Keep it simple
- Keep it consistent and
- Keep it current
Unless you run an accounting office or book-keeping service, book-keeping and accounts are not the core element of your business. Accordingly, you should out-source this activity as soon as possible.
Give it to someone who has the knowledge and expertise, not your sister/aunt/cousin or brother. Be absolutely certain that you know and understand what the regular reports mean and review and act on them promptly.
Also automate, automate, automate. Use the most appropriate, simple and affordable accounts package available to you. Take advice on that.
Start with invoicing customers; today if possible. Make it happen as soon as the goods or services are provided, if not on the basis of order There is no reason to delay this process.
Don’t give Credit unless you must. By default, all Sales should be paid for on delivery. When you are going to give Credit, check the Credit rating of the Customer and confirm your terms of account in writing. Give the minimum level of Credit acceptable to the Customer and insist that they comply with the terms from day one. Take direct responsibility for this: do not assume that it will happen automatically, because it won’t.
Bank Account Preparation
Insist on a Reconciled Bank Account regularly, no less often than monthly. A bank reconciliation is simply ensuring that everything on the Bank Statements is recorded in the books of account and vice versa. However it is a simple and essential control.
Profit & Loss Accounts with Cash Flow Statements
Even the most basic packages can provide Profit & Loss Statements. Review them monthly, with your Accountant or Business Advisor if necessary.
Ask the Accountant to produce a regular Cash Flow Statement. This answers the questions: What happened to all the money I made? Why do I not have any cash when I am making profits?
Decide what action you will take to improve results for profits and cash flow. Take the action.
Other People’s Money
Do not use other people’s money by default. Don’t delay paying Creditors & Suppliers because of your own poor cash management. Be especially vigilant that you do not use the taxman’s money; this is often easy in the short-term but disastrous in the mid to long term.
Working Capital Requirements
Working Capital is simply the amount needed to finance the day to day operations: cost of stock and work-in-Progress plus Debtors less Amounts due to Trade Creditors. Ensure that there is adequate working capital finance in place for both current and future expected levels of activity. Know your working capital cycle; basically how much finance is required for each additional unit of business.
Know, understand and take heed of the golden rule: Businesses do not go out of business because they fail to make profits; they go out of business because they run out of cash.
Short-Term Versus Long-Term Funding
Ensure that Long Term Assets are financed by Long Term money and that Short-Term Assets are financed from Short Term money.
These are simply the basics. If you are not clear: ask your Accountant. If you are still not clear, ask again. If it is still a challenge, change your accountant. Know the basics, understand the basics and apply the basics.
If you’d like more advice on the area of Cashflow Management, please contact us. We work with many business owners to help them build the business of their dreams, and would be delighted to chat with you.