CFO TIP – CASH FLOW
Balancing cash flow is crucial. More importantly however is your liquidity as represented by your “working capital”.
Working capital generally consists of:
- Cash & equivelants
Balancing the flow of these components is where you should focus:
- Cash – Retain as much as possible and make it earn interest in GIC’s or savings accounts. Don’t let it sit dormant even if it earns just enough to cover your bank fees.
- Receivables – Collect it as soon as possible using discount options for early payment or take credit card payments. If that isn’t an option, go for a drive and pickup payments. Keep channels of communication open with your customers. The better the relationship, the more likely you are to get paid.
- Payables – Develop timelines and cutoff processes to extend payment cycles as much as possible.
- Inventory – Keep your inventory moving. the faster the better as your inventory reflects dollars already spent. have you looked at the dusty boxes on the top shelf lately? that is money wasting away.
CFO Advanced tip
Ever wonder how to figure out how much cash you need?
Calculate it based on your cash flow cycle. Cash flow cycles are calculated as follows:
- Average number of days it takes to collect a receivable (ie 60 days)
- Average numbers taken to pay payables (ie 35 days)
- Average time needes to sell inventory (ie 90 days)
Based on the aforementioned timelines you require a cash reserve or line of credit that can carry you for 115 days (60+90-35)
Therefore if your monthly overhead and commitment costs are $3,000, you need $11,500 in funds to be able to sustain your business. ($3,000 / 30 x 115).
This does not include the need for inventory or capital purchases and only the funds needed to sustain your business.
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