Whilst profit and turnover are important steps of business performance but the major focus must shift to cash when times are as hard as they are at the start of 2011 and several businesses are finding themselves in difficulties.
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The most immediate indicator of the way a business is performing will be cash flow and it can also provide a warning signal that action needs to be taken to prevent a slide into bankruptcy.
Close attention to cash flow should provide a clearer picture of the immediate state of the business but while it might be possible to adjust to strengthen incomings towards outgoings this is only going to become a holding operation.
The business must also look at its business plan and business structure, preferably with the help of a turnaround agent. An objective outsider working as part of the company team to secure its medium plus longer term future may identify fundamental weaknesses that undermine the ability to control cash flow.
The first step in managing money is to construct a 13-week cash flow forecast to help identify risks and actions that can be taken to reduce all of them. It should include income from sales and other receipts and outgoings, each to ongoing obligations such as rent wages and finance and to lenders.
The business also needs to control cash on a regular basis, with payments made on a priority basis with purchases approved by a good authorised person who is aware of their impact on cash flow. This will avoid the risk associated with returned cheques. It is also advisable for a business to talk to the bank and keep it aware of what is being done to help keep things under control.
If the forecast can be showing that there is a mismatch within the timing of money coming in and set amounts that have to be paid out (such as leases for buildings plus equipment, wages and supplies) the cash flow forecast will show where the problems are and suggest what needs to be tackled and the order in which to do so.
For example , a business may have long-standing customers who are themselves facing problems and for the sake of retaining their business may have been allowed additional time to pay invoices. Action is needed, however , if this is beginning to push the business towards insolvency. It may be that an agreement can be made with the customers to pay outstanding invoices in small amounts over a good agreed period, which will keep at least some money coming in and preserve the relationship with all the customer.
In the same way, the company must deal with payments against receipts by prioritising them and paying out of money received in order of priority. Priority payments will be needed to keep the business going such as purchasing materials where suppliers are often on stop.
The intensity level of cash management depends on how severe the cash flow scenario is. Steps should be taken to enhance cash flow by looking at prices, staffing needs, overheads and all other costs to think about whether there are cost savings that can be produced. Does the company really need three hand lift trucks or can it deal with with two or even one, such as. Is it possible to renegotiate payments and costs with suppliers or reduce the quantity of supplies ordered? It is in their interests to negotiate since they too would want to survive and retain business. It may be that they will accept a rearrangement associated with, say, quarterly payments to monthly payments to keep things under control.
Similarly, are all the staff fully occupied? If not, and they are valuable people the business will not want to lose, it may be worth cutting overtime or negotiating reduced hrs or reduced wages. If people feel included in the decision making and are just about all working together to help the company survive contracts can be reached that will help the cash circulation situation in the immediate future while also protecting the longer term potential future.
Tight control of cash coupled with a thorough look at the business model and a realistic business plan will go a long way to help a company survive in difficult trading circumstances.