Many businesses complain that, in their books, they always see profits but there is no money in their safes. From losing control of their cash flow, they fall into debt, financial deficits and the inevitable end of bankruptcy. So what is the role of cash flow in businesses and how to manage cash flow? PCDN had a conversation on the above topic with Mr. Nguyen Hoai Nam, General Director of Berjaya Vietnam Company, a person with a lot of experience in this field.
What role does cash flow play in your opinion?
For a business, cash flow plays a very important role. Cash flow to a business is like blood to the body. For example, a business has 10 trucks transporting goods to customers. The money earned is enough to cover the costs of driver salaries, fuel, maintenance, depreciation and the rest is profit. Now suddenly there are 8 customers who are unable to pay their transportation fees on time due to difficulties. On the books, the financial situation of this business is still very healthy but there is no money left in the coffers to pay the drivers' salaries. This is a problem for many businesses.
So how to manage cash flow?
If we talk about it in financial terms, it will be very long-winded and difficult to understand. In my experience, to manage cash flow well, we only need to grasp the following 4 main issues:
1. Total amount of money I have (in my pocket, in my account…)
2. How much do I owe you?
3. How much do people owe me?
4. How much inventory is in stock?
A business's cash flow statement always includes cash inflows and cash outflows. If you have more cash inflows than cash outflows, you will have a good cash reserve. In cash flow, there are fixed and non-fixed costs (fixed costs and variable costs). Fixed costs usually include: rent, water, electricity, salaries, etc. (can be tolerant but are fixed). Variable costs usually include: business capital, interest payments, incidental costs, purchases, etc. The higher the fixed costs, the more proactive. The more variable costs are converted into fixed costs, the better. For example, electricity bills are not the same every month, but if we record and keep statistics well, there will still be a fixed number.
Between debt collection and debt repayment, which is more important, sir?
In my opinion, paying off debts is more important because the pressure is very high here. You will not feel secure in doing business when you hear nagging all day long, worrying that you are someone's debtor. Usually, people will choose to pay the loudest, nagging people, or will pay each person a little. Both of these methods are not good. If you pay each person a little, it may seem to calm down for a while, but it is only temporary, after that these creditors will continue the same song. You should also not pay the loudest creditors, but first determine who is the most important creditor.
These are debts that must be paid in order to continue working, otherwise the contract will be terminated, directly affecting the survival of the business. With debts that have not been fully settled, there is no need to be afraid to speak up or go to court. We even have a way to delay by asking them to complete the settlement. While waiting for them to complete the procedures, we have more time to pay other more important debts. In financial work, this is "floating time" of cash flow. We can take advantage of this allowed time. Of course, there must be goodwill, not beating around the bush or finding excuses to delay. For example, asking for a letter of introduction is not wrong, but if someone comes to work every week and suddenly asks for a letter of introduction, it is no different from making things difficult. The focus of debt repayment is to determine who to pay and when to pay.
Debt collection would be less stressful?
Less pressure but debt collection is a passive job and depends entirely on the partner. In my opinion, if any debtor masters the debt repayment techniques mentioned above, it will be very difficult for the creditor to collect the debt. In debt collection, you should "have" two things ready: the plan must be pessimistic but the spirit must be optimistic. For example, if someone says "I will pay you back in a week", you must think in your mind that it will be two or three weeks.
In the 4 principles of cash flow management, you mentioned inventory, do you mean converting to cash?
It’s not that simple. For example, if you buy 10 coins, you must know that if you sell them immediately during difficult times, they will only be worth about 5-6 coins. That is, if you accept the inventory immediately, how much cash will it be?
If the director only relies on the numbers in the income and expenditure books, it is not okay. Because the profit is only real when all the money is collected, for example, buying 10 and selling 12 is a profit, but that is not true, because the money has not been collected, so how can it be called a profit. The goods sold still have the risk of being returned!
What role does accounting play in cash flow management?
Accounting is just a post-recording job, only when there are expenses and income does the accounting come to mind. The chief accountant can only control a part but cannot manage, only the business director or financial director can manage the cash flow.
So what if everyone masters these 4 principles?
You worry that when everyone masters these 4 principles, it will be difficult to "overtake", right? Don't worry, life is never exactly the same as theory; the same technique but not the same skill; the hard framework is the same but the soft skills are always different; level is not equal to attitude. That's why there are stories of people coming to collect debts but why do some people get paid and others don't?
According to you, when do you know there is a "problem" with cash flow?
Experience shows that if revenue and net profit increase but cash flow in the business decreases, be cautious. Cash flow never lies.
Thank you!
| Mr. Trinh Si Minh - Chairman of Zaa Accessories SystemOur company operates in the fashion industry with a chain of jewelry and fashion accessories stores. In my opinion, depending on the goals and orientations of each business, there will be different ways to manage cash flow. Our business can mobilize capital from support channels from banks, investors and flexibly rotate it according to the direction set by the company. At that time, our cash flow can be mobilized through investors after they see that our business operations are stable and effective. This year, Zaa will open about 10 more stores in Ho Chi Minh City in the form of franchising. Through this form, our cash flow management is also guaranteed and Zaa will be more widely popular. | Ms. Vu Thi Hue, Director of Ic Construction Investment & Consulting Company It is true that there are cases in which, in business activities, looking at financial reports, it is clear that there is profit, but in debt repayment, it is impossible to pay debts due or pay salaries to employees late... These things make the business lose its reputation, production and business stagnate. Therefore, to avoid risks and ensure business activities, businesses need to make monthly and quarterly cash flow forecasts based on forecasting payables, receivables and non-receivables from customers. And the last thing is to negotiate with partners about payment terms and conditions. |
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