FINANCIAL LITERACY LEARNING CENTER

SMALL BUSINESS

MANAGING CASH FLOW AND RECORDKEEPING

CORE COMPETENCY OF SMALL BUSINESS OWNERSHIP

CASH CONVERSION CYCLE

The cash conversion cycle is one way of looking at cash flow and consists of three components;

  1. A business pays for raw materials.
  2. The business makes a product or service using those materials.
  3. The business sells those products or services to make money to buy more materials.

It’s important to know how long it will take to get through the cycle because this impacts cash flow. The faster the cycle goes, the faster you can buy new materials to make more products and, in turn, make more money. If you have inventory sitting on a shelf, you’re not able to use that money to make more and sell more. In conclusion, the quicker the better.

Cash Conversion Cycle Graph

TIPS TO INCREASE CASH FLOW

If you find your business isn’t generating cash quickly enough, here are some simple steps you can follow to help increase cash flow:

  • Incentivize people to pay with cash
  • Negotiate with vendors and suppliers for better terms or payment plans
  • Reduce costs when able (staff, reduced options)
  • Do not postpone paying estimated taxes
  • Do not hide from loan officers—they can provide invaluable advice
  • Do not pay vendors late (they can cut off supply)
  • Do not overestimate revenue
  • Do not underestimate costs

IMPORTANCE OF RECORDKEEPING

The success of your business depends on creating and maintaining an effective record system. One reason it’s so important is for tracking details, such as customers, sales and inventory. It will help you keep track of important details such as who your customers are, what their needs are and what they’re like. In order to run a business, you need customers, and in order to keep customers, you need to keep them happy and give them what they want. Tracking details will also help you with future planning. Without doing so, how will a business know what they need to order or what has been selling well? Recordkeeping is also important for staying in legal compliance. There are certain documents you are required to keep, such as contracts or employee payroll for tax purposes. Be sure to keep original copies of everything and understand what you need to keep and for how long.

RECORDKEEPING TOOLS

There are several tools you can use for recordkeeping, but it’s a good idea to start off simple, and as your business grows, you can adapt a more complex recordkeeping system to meet your changing business needs. The most basic system is simple “paper tools,” such as file folders and cabinet storage. This is a good method for all paper documents. Another you could use is a “tickler” system, which is helpful for remembering certain dates or deadlines. This could be used for license renewals, upcoming bills or call-backs.

A more modern way of keeping records is with computer systems. This is more convenient as it’s quicker and takes less space. You must remember to back up your computer regularly though or you could lose data. Cloud computing is another option that is becoming popular. It allows you to access information from anywhere, and you are less likely to lose data due to crashing. If you choose this method, it’s important to have appropriate security put in place to prevent others from accessing confidential information.