Does your Café experience the following?
- Consistently in a Bank Overdraft?
- Struggling to pay taxes when they fall due?
- Not paying yourself a wage?
- Not paying creditors on time?
The simple rules for good cash flow management are.
- Get the cash in the bank for as long as possible and keep it for as long as possible.
- Have your tax money in a separate bank account.
- Know what bills are to be paid and when.
In this post, I will look at how you can manage your cash flow.
The traits of a cafe which struggles with cash flow are usually as follows.
- Don’t have a handle on their accounts.
- Using the bank balance to manage the business decisions relying on your perception and memory rather than process and checklists.
- Not knowing who owes you money.
- The longer you leave a sale, the more likely the sale will be written off as a bad debt.
- Not adhering to your credit terms.
- Not having agreed the credit terms will result in some customers paying on time while others will wait for you to call them after the date.
- Growing too quickly
- Taking on future contracts which require additional costs now. If you don’t match the debt/equity with the funding requirements beforehand this will lead to you running out of cash.
Joan has a small Café in Galway which sells a popular brand of Coffee across Ireland; she sells direct to her customers from her café and also wholesale to other cafes.
- She pays for the stock upfront.
- She gives 30-day credit to her wholesale customers.
- At the end of the 30 days, she is responsible to take back any stock which did not sell.
- Her coffee is available the largest cafes in Galway, Dublin, Sligo, and Cork and she is planning on exporting.
The perception is she is doing extremely well given her growth, however underneath this business is a ticking time bomb.
- Joan pays for her stock upfront she uses her credit card to pay for half the other half is made up from the café current account.
- She will not receive a cent until the 30 day is up.
- After the 30 days, she is responsible to take back the stock which did not sell.
- If all the stock sells she will need to ensure she has enough cash to pay off the credit card and look at how to finance the next purchase of stock.
- If all the stock does not sell, then you don’t have the cash to pay off the credit card as well as fund future purchases.
- She has a VAT bill of €25,000 due this month and a PAYE bill of €4,500.
- She is always in her overdraft of €20K.
- The orders are growing and she feels she needs to sell more but does not know why the bank account is always in the red.
How can Joan better manage her Cash Flow?
- Get trade credit on her purchases. (this will help keep cash in the business)
- Reduce the credit terms on sales to zero on all new customers.
- Set up a direct debit facility of weekly/monthly payments for existing customers.
- Don’t allow returns on product unless for quality reasons.
- Get an accountant to work out the working capital required of the business. (how much is needed to run the cycle of buying the stock sell and paying for the other operating expenses)
- Match the funding requirements with the appropriate type of debt perhaps take a loan to clear the overdraft and give time to put the correct systems in place.
- Open a second bank account and carve out the VAT and Payroll taxes every week.
Managing cash flow is tricky.
If you are struggling to understand where your cash has gone or why there never appears to be enough to build the bank balance be sure to get in touch.