I remember the first time my business partner and I received our first professional fee from the firm, we were ecstatic. We decided to split the revenue equally and went on with our individual tasks. Few months passed, I noticed that my money has suddenly disappeared. This was when I realized that managing your money is really challenging. Have you ever encountered a similar situation of having idle cash at one point but eventually grasping to survive with your business expenses the following month? This article might help you improve.
Cash Flow is the heart of any business, whether the business is a Micro, Small and Medium Enterprise (MSMEs) or a large company. Cash Flow should be one big consideration of any business. We commonly refer to cash flow as the working fund, or the money we spend to run our business from day to day. Thus, MSME’s should know how to manage Cash Flow because what is important to the existence of large companies must also be crucial to small companies especially when MSMEs’ cash resource is limited.
Here are some simple solutions to prevent cash flow problems:
Open Bank Account exclusive for Business
Being the sole owner of the business does not excuse you from separating personal and business bank transactions. The risk of misappropriation of funds is so high that it might ruin your cash flow. Designate a separate bank account for your business where you can easily identify the matching activity of your company. Banks such as BPI and Security Bank offers convenient ways to open checking account for your business.
Apply Check Voucher System
Cash flow management starts with proper recording. The Bureau of Internal Revenue (BIR) directed business owners to issue receipts and invoice for revenue and cash collections received. As such, the implementation of the check voucher system will not only help you monitor each disbursement but will also result to well-organized substantiation of tax-deductible expenses should BIR conduct an audit of your records in the future. The information on the check voucher, which includes recording the date, bank/branch, check number, payee, and amount, will definitely ease the cross-referencing of your expense history. In contrast, the petty cash system is applicable for small disbursements. There are pre-printed check vouchers and petty cash forms available in your local bookstores and office supplies stores if you do not want to create your own template.
Prepare a Cash Budget
Many start-ups and small businesses give lesser attention on planning cash flow. Cash Budget will highlight your expected cash inflows and cash payments in a given period, usually monthly, for you to anticipate change in cash balance. An ideal cash budget is projected three (3) months in advance. This is usually done so that should there be computed negative cash balance, you will still have months to think of solutions whether to increase cash generation or reduce cash expenditures. Consequently, projected excessive cash balance in the coming months will provide you enough time to wisely decide on investments to be made. There are available cash budget tools and
software on a subscription basis.
Use bank reconciliation
Common fault of small businesses is to refer to their passbook as the ultimate source of “cash balance.” Bank reconciliation is one way to solve this. Bank reconciliation is the process of matching the balances of a business’ accounting records for a cash account to the corresponding information on a bank statement. Two things bank reconciliation provides (1) it reflects your company’s cash book balance and (2) it manages released check disbursements from bouncing. Cash book balance is a more reliable basis of the company’s liquidity than the passbook balance. Avoiding issued checks from returning will save you from paying unnecessary bank charges and penalties and prevent inconvenience with your suppliers. Bank reconciliation is also a tool to check and balance the accuracy of your accounts receivable and accounts payable ledger. The usual practice is to prepare bank reconciliation on a weekly basis, so should there be bank discrepancies it can be immediately corrected.
Arrange credit limit from suppliers
As much as possible, purchase of goods and acquisition of services must be done with credit terms. This best applies to your major suppliers which will normally agree within a 30-day period. Stretching account payables will increase your cash ending balance that can be redirected to income generating activity. Though you should always weigh-in between purchase discount on cash payment or shorter credit term against the profit to be earned by rolling-out the money in the business within the extended credit term.
Ease the process of collection
This solution depends on the type of customers you have. This step includes offering various options to your client to facilitate their payment. If applicable to the nature of transaction, asking for post-dated checks (PDC) is the most convenient. You may also offer online
payment or bank to bank transaction to eliminate time spent by your collectors in visiting your client’s physical location. You may also explore the option of offering sales discount to encourage early payment from your customers. For default collectibles, you may request a corporate lawyer to issue a demand letter in your behalf prior to filing formal complaints to the court.
Introducing these new practices might be challenging to everyone’s business. However, once it becomes part of your system, cash flow issues will be easily resolved. It will make every centavo earned by your business count and will make every person in your company, including business owners, accountable.
