Cutting costs: maximizing results
By Definition: Cost management is the process of planning and controlling the budget of a business. Cost management is a form of management accounting that allows a business to predict impending expenditures to help reduce the chance of going over budget.
At its simplest, Cash flow management means delaying outlays of cash as long as possible while encouraging anyone who owes you money to pay it as rapidly as possible. Prepare cash flow projections for next year, next quarter and, if you're on shaky ground, next week.
How to Better Manage Your Cash Flow
These four steps will help you keep track of the money coming in and out of your growing company.
Cash is king when it comes to the financial management of a growing company. The lag between the time you have to pay your suppliers and employees and the time you collect from your customers is the problem, and the solution is cash flow management. At its simplest, cash flow management means delaying outlays of cash as long as possible while encouraging anyone who owes you money to pay it as rapidly as possible.
Measuring Cash Flow
Prepare cash flow projections for next year, next quarter and, if you're on shaky ground, next week. An accurate cash flow projection can alert you to trouble well before it strikes.
Understand that cash flow plans are not glimpses into the future. They're educated guesses that balance a number of factors, including your customers' payment histories, your own thoroughness at identifying upcoming expenditures, and your vendors' patience. Watch out for assuming without justification that receivables will continue coming in at the same rate they have recently, that payables can be extended as far as they have in the past, that you have included expenses such as capital improvements, loan interest and principal payments, and that you have accounted for seasonal sales fluctuations.
Start your cash flow projection by adding cash on hand at the beginning of the period with other cash to be received from various sources. In the process, you will wind up gathering information from salespeople, service representatives, collections, credit workers and your finance department. In all cases, you'll be asking the same question: How much cash in the form of customer payments, interest earnings, service fees, partial collections of bad debts, and other sources are we going to get in, and when?
The second part of making accurate cash flow projections is detailed knowledge of amounts and dates of upcoming cash outlays. That means not only knowing when each penny will be spent, but on what. Have a line item on your projection for every significant outlay, including rent, inventory (when purchased for cash), salaries and wages, sales and other taxes withheld or payable, benefits paid, equipment purchased for cash, professional fees, utilities, office supplies, debt payments, advertising, vehicle and equipment maintenance and fuel, and cash dividends.
"As difficult as it is for a business owner to prepare projections, it's one of the most important things one can do," says accountant Steve Mayer. "Projections rank next to business plans and mission statements among things a business must do to plan for the future."
Improving Receivables
If you got paid for sales the instant you made them, you would never have a cash flow problem. Unfortunately, that doesn't happen, but you can still improve your cash flow by managing your receivables. The basic idea is to improve the speed with which you turn materials and supplies into products, inventory into receivables, and receivables into cash. Here are specific techniques for doing this:
Offer discounts to customers who pay their bills rapidly.