Here’s a phrase I like:
“Revenue is vanity, profit is sanity – but cash flow is KING”.
You may have felt the pain of a cash flow crunch before…
A lack of cash can keep you from paying your bills, making suppliers or contractors angry.
And it sometimes feels even frustrating because you know that you’re waiting on people to pay you!
Lastly – a lack of cash is the number one thing that keeps trades and construction business owners up at night. It’s not pleasant – so let’s look at how to avoid cash flow crunch…
One of the simple numbers we like to use with our bookkeeping clients it the “Quick Asset Ratio”.
What’s the Quick Asset Ratio?
It’s a measure of your ability to convert your current assets into cash to cover your liabilities.
It’s a simple way to answer the question, “am I going to be able to cover my bills”?
A Quick Asset Ratio anywhere between 1 and 2 is considered good. This means you have enough cash to cover your bills.
But if your Quick Asset Ratio dips below 1, that’s telling you that you have more bills than you have ready cash to pay them.
The Quick Asset Ratio is super-useful because it warns you in advance of an impending cash crunch so you can do something about it.
3 ways to improve your Business Cash Flow
- Increase cash holdings – this simply means having a higher cash buffer in the business. Maybe it means not taking out as much cash in the short term. This way, your business will be able to handle the ride the ups and downs in cash flow that can come along from time to time.
- Optimise your accounts payable – this may mean getting better terms from suppliers, ensuring you aren’t paying invoices early, or calling up suppliers in advance to pre-negotiate a payment plan. Suppliers are usually happy to co-operate when you’re up front with them.
- Optimise your accounts receivable – for example: are you invoicing jobs as soon as you’re able? Are you following up on overdue invoices the day they become overdue? Are you stopping supply to non-paying customers? Could you change your payment terms or progress payments in your favour?
These are all viable strategies. Remember, a cash flow crunch should never be a surprise. There are always warning signs. If you look out for them, there are many things you can do to prevent the problem before it occurs.
If you’d like to work with a bookkeeper who helps you optimise your business cash flow, get in touch for an obligation-free chat.