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GAME PLANS TO MAINTAIN POSITIVE BUSINESS CASH FLOW?

Arikrishnan Subramanian
Arikrishnan Subramanian

Business experts acknowledge that healthy cash flow is the life-blood of your business. Some of them even argued that the movement of money in and out of your business more important than ability to deliver its goods and services. A business is said having positive cash flow when its inflow money or cash collected primarily come from the sale of goods or services exceed their outflow.

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18 FINANCE by Arikrishnan Subramanian FINANCE 19 GAME PLANS TO MAINTAIN POSITIVE BUSINESS CA$H FLOW? Business experts acknowledge that healthy cash fl ow is the life-blood of your business. Some of them even argued that the movement of money in and out of your business more important than ability to deliver its goods and services. A business is said having positive cash fl ow when its infl ow money or cash collected primarily come from the sale of goods or services exceed their outfl ow. Infl ow Outfl ow Cash sales Payment for purchases Receivables from sales of goods or services Business operating expenses Borrowings Purchase of assets Cash from business sales assets Payment of Loans /Interest Investment Incomes Taxes Malaysian Indian Business [MIB] research team found that most of Malaysian Indian businesses often face cash shortages that prevent them from meeting fi nancial obligations that resulted diffi culty in planning for the future and expansion. MIB share some game plans business can try in improving their cash fl ow: SET YOUR PRICES COMPETITIVE Setting price competitively with desire profi t margin is very crucial for business to sustain continuously in the marketplace. The game plan for competitive pricing needs better pricing strategy and effective cost of goods sold purchasing mechanism. In setting competitive price business owners may consider the following factors: Their product position in the market and customer segment The relationship between the price and quantity sold Examples of Infl ow and Outfl ow Your distribution and promotion of your products The costs associated with your products including the fi xed and variable costs Your competitors pricing The method of calculating price and what you want to achieve? Try to negotiate for a better price with suppliers, possibly buy in bulk if stock turnaround is faster Get discount by paying earlier Get best pricing for your supplies by shopping around for other competitive suppliers Implement new effi cient processes in producing your goods DONT PAY TOO EARLY BUT MANAGE YOUR DEBTORS Hold on! Dont get confused. Read further following three steps game plan. First: Manage you debtors as until money not in your bank a sale isnt a sale. Following step by step actions might assist to reduce accounts receivables: Receiving deposits on signing of sales confi rmation Offer discount for early payment Issue invoices immediately Review receivable reports regularly and follow up with overdue Should customer face problem be fl exible by offering easy payment plan Where possible accept payment via credit card Second: Manage you stocks Youre out of business if no stock while too much stock can impact cash fl ow heavily. The right stock level needs very sharp business acumen with good accounting knowledge. Some examples of how to improve stock control: Set minimum and maximum levels of stock and stay within these levels Clear old and outdated stock by offering discounts Use ratios such as inventory turnover and days inventory to compare to previous p e r i o d s and industry standards For fast moving stock, buy in bulk to receive a discount Focus on a just in time ordering system Third: Dont pay too early Proper procedures and monitoring may reduce overpayments or payment for non-delivered goods. An example of overpayments, is when for payments made based on a statement and yet not have an invoice to verify the purchase. To avoid such situation include: Two signatures for accountability on purchase orders Request new quotes on half yearly basis for products previously purchased A proper procedure for receiving goods A procedure for payment of goods that requires purchase order, delivery docket, invoice and statement. The level of paperwork required may vary depending on the size of your business Cash Flow Sept 14 Oct 14 Nov 14 Dec 14 Opening Balance (55,500.00) (37,100.00) (18,500.00) 900.00 Receipt from Customers 72,000.00 75,000.00 73,000.00 73,500.00 Total Cash inwards 72,000.00 75,000.00 73,000.00 73,500.00 Less Cash Outfl ows Cost of Sales 36,000.00 36,000.00 36,000.00 36,000.00 Wages 10,000.00 10,000.00 10,000.00 10,000.00 Total Overheads 7,600.00 7,600.00 7,600.00 7,600.00 Taxation 2,800.00 2,800.00 Total Cash Outfl ows 53,600.00 56,400.00 53,600.00 56,400.00 Closing Balance (37,100.00) (18,500.00) 900.00 18,000.00 Example of 3 months cash fl ow statement | AUGUST 2014 AUGUST 2014 |
MAINTAIN 3 MONTHS CASH FLOW STATEMENTS A profi table business can still have cash fl ow problems. For example, QWE bought stock for RM8, 000 in July. They paid for the stock at the end of August. The stock was sold to XYZ for RM12, 000 in September and they received the money for the sale in November. In September QWE has recorded a profi t of RM4, 000. However, the profi t doesnt hit the bank till two months later. By maintaining a three month cash fl ow budget any excess cash should be transferred to a high interest bank account that can be easily accessed when it is needed or prepare action plan to reduce impact of negative cash fl ow. | AUGUST 2014 20 FINANCE Pay your creditors on the day the invoice is due. Do not pay early or late Negotiate longer payment terms or a payment plan if the business is struggling Negotiate discount for early or up-front payment OWNERS REDUCE YOUR DRAWINGS WHAT, Im bringing in business and you say dont take the money out for my use? Thats the usually crumble by most of the entrepreneurs. Well, we understand your pressing need but the survival of business is more crucial them your current needs. One of the most common problem among Malaysian Indian businesses are owners withdrawing more cash than the business able generate, followed by poor fi nancial reporting. Drawing out wages in excess of profi t generated by business for personal expenses without considering future cash outfl ows need can destroy a business very quickly. Business owners may need fi nd the balance between reinvesting the profi ts to grow your business and enjoying the rewards of your hard work now or postpone it to a much later stage. We suggest a regular wage withdrawal much lower than monthly net profi t of your business to enable the doubling effect took place. MIB MEET UP 1. Details as our Facebook Page: www.facebook.com/MalaysianIndianBusinessMagazine 2. Bring along this original voucher to AUGUST 2014 MIB MEET UP Session along with one business guest. 3. Its FREE for you and your Guest gets 50% off.

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GAME PLANS TO MAINTAIN POSITIVE BUSINESS CASH FLOW?

  • 1. 18 FINANCE by Arikrishnan Subramanian FINANCE 19 GAME PLANS TO MAINTAIN POSITIVE BUSINESS CA$H FLOW? Business experts acknowledge that healthy cash fl ow is the life-blood of your business. Some of them even argued that the movement of money in and out of your business more important than ability to deliver its goods and services. A business is said having positive cash fl ow when its infl ow money or cash collected primarily come from the sale of goods or services exceed their outfl ow. Infl ow Outfl ow Cash sales Payment for purchases Receivables from sales of goods or services Business operating expenses Borrowings Purchase of assets Cash from business sales assets Payment of Loans /Interest Investment Incomes Taxes Malaysian Indian Business [MIB] research team found that most of Malaysian Indian businesses often face cash shortages that prevent them from meeting fi nancial obligations that resulted diffi culty in planning for the future and expansion. MIB share some game plans business can try in improving their cash fl ow: SET YOUR PRICES COMPETITIVE Setting price competitively with desire profi t margin is very crucial for business to sustain continuously in the marketplace. The game plan for competitive pricing needs better pricing strategy and effective cost of goods sold purchasing mechanism. In setting competitive price business owners may consider the following factors: Their product position in the market and customer segment The relationship between the price and quantity sold Examples of Infl ow and Outfl ow Your distribution and promotion of your products The costs associated with your products including the fi xed and variable costs Your competitors pricing The method of calculating price and what you want to achieve? Try to negotiate for a better price with suppliers, possibly buy in bulk if stock turnaround is faster Get discount by paying earlier Get best pricing for your supplies by shopping around for other competitive suppliers Implement new effi cient processes in producing your goods DONT PAY TOO EARLY BUT MANAGE YOUR DEBTORS Hold on! Dont get confused. Read further following three steps game plan. First: Manage you debtors as until money not in your bank a sale isnt a sale. Following step by step actions might assist to reduce accounts receivables: Receiving deposits on signing of sales confi rmation Offer discount for early payment Issue invoices immediately Review receivable reports regularly and follow up with overdue Should customer face problem be fl exible by offering easy payment plan Where possible accept payment via credit card Second: Manage you stocks Youre out of business if no stock while too much stock can impact cash fl ow heavily. The right stock level needs very sharp business acumen with good accounting knowledge. Some examples of how to improve stock control: Set minimum and maximum levels of stock and stay within these levels Clear old and outdated stock by offering discounts Use ratios such as inventory turnover and days inventory to compare to previous p e r i o d s and industry standards For fast moving stock, buy in bulk to receive a discount Focus on a just in time ordering system Third: Dont pay too early Proper procedures and monitoring may reduce overpayments or payment for non-delivered goods. An example of overpayments, is when for payments made based on a statement and yet not have an invoice to verify the purchase. To avoid such situation include: Two signatures for accountability on purchase orders Request new quotes on half yearly basis for products previously purchased A proper procedure for receiving goods A procedure for payment of goods that requires purchase order, delivery docket, invoice and statement. The level of paperwork required may vary depending on the size of your business Cash Flow Sept 14 Oct 14 Nov 14 Dec 14 Opening Balance (55,500.00) (37,100.00) (18,500.00) 900.00 Receipt from Customers 72,000.00 75,000.00 73,000.00 73,500.00 Total Cash inwards 72,000.00 75,000.00 73,000.00 73,500.00 Less Cash Outfl ows Cost of Sales 36,000.00 36,000.00 36,000.00 36,000.00 Wages 10,000.00 10,000.00 10,000.00 10,000.00 Total Overheads 7,600.00 7,600.00 7,600.00 7,600.00 Taxation 2,800.00 2,800.00 Total Cash Outfl ows 53,600.00 56,400.00 53,600.00 56,400.00 Closing Balance (37,100.00) (18,500.00) 900.00 18,000.00 Example of 3 months cash fl ow statement | AUGUST 2014 AUGUST 2014 |
  • 2. MAINTAIN 3 MONTHS CASH FLOW STATEMENTS A profi table business can still have cash fl ow problems. For example, QWE bought stock for RM8, 000 in July. They paid for the stock at the end of August. The stock was sold to XYZ for RM12, 000 in September and they received the money for the sale in November. In September QWE has recorded a profi t of RM4, 000. However, the profi t doesnt hit the bank till two months later. By maintaining a three month cash fl ow budget any excess cash should be transferred to a high interest bank account that can be easily accessed when it is needed or prepare action plan to reduce impact of negative cash fl ow. | AUGUST 2014 20 FINANCE Pay your creditors on the day the invoice is due. Do not pay early or late Negotiate longer payment terms or a payment plan if the business is struggling Negotiate discount for early or up-front payment OWNERS REDUCE YOUR DRAWINGS WHAT, Im bringing in business and you say dont take the money out for my use? Thats the usually crumble by most of the entrepreneurs. Well, we understand your pressing need but the survival of business is more crucial them your current needs. One of the most common problem among Malaysian Indian businesses are owners withdrawing more cash than the business able generate, followed by poor fi nancial reporting. Drawing out wages in excess of profi t generated by business for personal expenses without considering future cash outfl ows need can destroy a business very quickly. Business owners may need fi nd the balance between reinvesting the profi ts to grow your business and enjoying the rewards of your hard work now or postpone it to a much later stage. We suggest a regular wage withdrawal much lower than monthly net profi t of your business to enable the doubling effect took place. MIB MEET UP 1. Details as our Facebook Page: www.facebook.com/MalaysianIndianBusinessMagazine 2. Bring along this original voucher to AUGUST 2014 MIB MEET UP Session along with one business guest. 3. Its FREE for you and your Guest gets 50% off.