We all hear the words every day – “Cash is King”!  Clearly it is preferable to have physical cash in your hand, than say a cheque or even money in the bank.  Why do you think that that is?

Firstly if the money is in the bank, then there may be expenses that still need to go off your account, you would still need to go to the bank to draw money or alternatively you may not have the card or the correct access codes to get the money out of the bank.  So having physical cash in your hand is always a good thing.

Let’s have a look at what cash flow is – exactly.  Quite simply, it is the physical money that you have access to at any given time.  It’s not the money that you are waiting to be paid.  It’s not the stock that you are waiting to sell – it’s the physical cash that you have access to at any given time.

Having a good cash flow is absolutely imperative.  As SMME’s (Small, Micro, Medium Enterprises) we need a good cash flow in order to purchase our supplies, to pay rent, to pay our staff and to pay our way in the every day manner in which we conduct our business.  In short it is that lifeblood that we need in order to earn our livelihood, without it we would whither up and literally die.

So how do we get this ‘cash flow’?

First of all we need to get money into the business – this is usually referred to as a “cash inflow” and it is usually made of up four different components, these are:

• Sales of our products and services – well that’s pretty self explanatory.
• Loan or credit card proceeds – this is either money that we have loaned from a bank or financial institution or indeed money that we have loaned our business in our personal capacity or money that is coming to us from sales that were paid for by means of credit cards or indeed money that we have ‘borrowed’ on our credit cards, even money that is owed to us by our debtors.
• Asset Sales – this would be when we sell assets (such as old computers or vehicles etc) that were previously purchased by the company that we are now upgrading or even just getting rid of.
• Owner investments – these would be property or financial or business investments that we have made on behalf of our company.

Then of course money goes out of the business – this is usually referred to as “cash outflow” and again it is usually made up of four different components, these are:

• Business expenditures – these are of course the expenses that are raised in the normal day to day running of the business.  This would also include salaries and wages etc for the staff.
• Loan or credit card principal payments – just as you got the money either from a loan or your credit card, now you have to pay that loan back or pay your credit card back.
• Asset purchases – again, just as you sold old equipment or equipment that you no longer needed, so now you have to buy new equipment or assets for the business.
• Owner withdrawals – again that is pretty self explanatory and it is when the owner takes money out of the business for personal use.  These drawings are usually offset against the money that the owner has lent to the business out of his/her loan account.

Both the ‘Cash Inflows’ and the ‘Cash Outflows’ also fit into three main categories within the business and these are:

• Operating – this covers the sales of product or services of your business, together with the business expenses that you incur in the selling of your product or service.
• Investing – this would be all the assets that you buy and sell and
• Financing – this obviously covers all the loans and the repayments of the loans as well as the money that the owner has invested into his/her business and the withdrawals that he/she makes for personal use.

So there you have it, basically what cash flow is and the ‘how’ and ‘what’ it relates to.

Now, we will look at the ‘how to’ of managing cash flow.  For me as usual, it’s the simplest method of ‘how to’ that I will be sharing, so please just be aware that there are many more components and levels of complexity to this subject.

It is important to understand that most of the money that you generate as an inflow should be from the sale of your product or service.  It cannot be from investing or finance – if this is the case you are going to be very deep in the smelly brown stuff without a shovel to dig yourself out.  So sales are obviously key, irrespective of whether you are selling a product or a service.

It is also important to understand that the inflow and outflow of your business tells the story of how healthy or unhealthy your company is.  That is one of the reasons that I believe it is so important to have the services of a really good accountant to assist you.  The understanding and ‘reading’ of the story of your business can only be done by someone who is experienced in these matters and someone who will tell you where you are going wrong and guide you back onto the correct path.  My someone, is Nico Labuschagne of Less Tax 4 U and I am quite happy to share his contact details if you ask for them.

That said it is also very important to understand that cash flow is a ‘real time’ issue as opposed to having your books done on a monthly basis – by the time they get to the bookkeeper/accountant they are already a month or so old and are therefore a ‘reactive’ issue.  You cannot wait for a whole month to then realize that you have no money to pay the bills that are coming in and are due, right now!  In terms of cash flow, you have to be proactive – you have to know what is happening right now!

To create a cash flow statement, and remember that it is a living breathing document and it changes all the time, you need to take all the business inflows and subtract all the business cash outflows.  This is usually done on a monthly basis but it can be done for any specific period.  Obviously doing this manually is a pain in the rear end and by using an accounting package to generate financial statements and thereby producing a Cash Flow statement, would be the simplest way to do it (another reason for a Nico in my life, I don’t have to invest in expensive software accounting packages.)

When you work out your budgets, it is extremely important to use ‘cash flow projections’, because if you as a business owner, do not understand the way that your cash flow operates, you will find yourself in a cash flow crunch, where you will be waiting for funds to come in, but have operating expenses that need to be paid now.

This is particularly true if you have or run sales on account (hopefully you are then registered with the National Credit Authorities as a service provider), or alternatively have clients who pay 30 or 60 or even 90 days.  You need to make provision to ensure that you have enough cash on hand to pay your bills while you wait for monies to come in.

As SMME’s, I am sure that you will agree that this is a very difficult position to be in  and this is why it is vital to firstly know, what is happening from a financial prospective, in your business and secondly to understand what happens when you have cash flowing both in and out of your business.

Understanding and knowing where your money is coming in from and where your money is going out to, is key to controlling your cash flow.

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About the author: Nikki Viljoen is a guest blogger for Afrinection and is the founder of Viljoen Consulting. Her website is  www.viljoenconsulting.co.za and she can be reached on Twitter and Facebook.