By Nikki Viljoen – Viljoen Consulting – April 2016
Last time, remember, we discussed the only 3 reasons why you will find yourself in a cash flow crisis. To remind ourselves, there were:-
1. You’re not making enough money. This usually means that you have to increase the number of sales that you are making or alternatively it may mean that your margins are incorrect, which means that your profits are too small or even non-existent. Either way you are not making enough money.
2. You are not getting your debtors to pay you. That means that your money coming in is insufficient to meet the needs of your money going out.
3. You are spending too much money!
In the interests of clarity, let’s just be clear on something else here too – the only person responsible for your cash flow crisis is you. You are the only person who has to manage your cash flow and the only way that you could have ended up with a cash flow problem is if you failed to manage your sales, your collections and your expenses.
You need to step up and take responsibility and be accountable for the situation that you find yourself in. I know that this is probably not what you want to hear but in order for you to take ownership of the problem and sort it out, you need to understand that you have the problem because you failed to adequately manage these three elements.
In order for you to overcome your cash flow problem you need to take control of the situation.
So let’s break it down
Firstly, take a big breath and calm yourself down!
Getting into a state is not going to help the situation. You need to give your full attention to finding the solutions to your problem and you will not be able to do this effectively if you are in a state of panic.
First things first.
Before you can fix the problem you have to know exactly what the problem is. It may be that you have a specific problem, for example you are not collecting your funds efficiently or it may be that it is a combination of all three.
So the first thing that you need to know is exactly how much money you owe to people and how much is owed to you.
You will need to be brutally honest with yourself here and although it can be one of the most painful exercises that you will ever have to do, please understand that it will have to be done and once done will be very liberating too. Don’t leave anyone off the list. If you owe the newspaper guy R5, put it on the list.
By the same token, if somebody owes you R5, that must also go onto the list.
To take this one step further you need to record the date from which you owe the money or are owed. Then calculate how long the debt has been outstanding for both your creditors (those who gave you credit or who you owe money to) and your debtors (those you owe a debt to and who you owe money). This document is called an aging analysis. This will give you a better understanding of exactly how much you owe as well as how much you are owed and in both instances, for how long.
Once you have all of this information, have a closer look at all your creditors and in order of priority, list those who need to be paid immediately as well as who can be paid a bit later. The length of time that the money is owed, plus the value of the debt and of course the person who is shouting the loudest for their money, usually determines who gets paid first and how much is paid.
Whilst you are in this state of “crisis”, it is advisable to do this exercise on a daily basis, recorded which suppliers you have paid, how much you paid, when they were paid and the balance that you still owe them. Remember to add all your “new” suppliers onto the list too.
On the debtor’s side, make sure that you list each and every payment that you receive and make a note of “how” you have allocated it to the creditors that you have paid. Again, for the moment do this on a daily basis so that you can track that what has come in and gone out to those that you need to pay, in order for them to give you a little breathing space and room to maneuver.
Next time we will have a look at how to take the next important step!
Next time we will delve a little deeper into the mystery that is cash-flow to get a little more clarity
Nikki is an Internal Auditor and Business Administration Specialist who can be contacted on 083 702 8849 or nikki@viljoenconsulting.co.za or http://www.viljoenconsulting.co.za
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