In simple words, good cash flow management means having enough cash on hand to settle payables. This makes managing cash flow important for all businesses, and for many, essential for survival.
While this may seem easy enough, in practice, it can be difficult to execute for even mid- to large-size organizations. What’s more, despite being profitable, a shortage of cash flow in any business can quickly result in financial embarrassment or bankruptcy!
Don’t let this information worry you; if you’re having a tough time maintaining a positive cash flow each month, you’ve come to the right place. Read on for 5 simple steps you need to take to manage and improve your company’s cash flow.
Budget and Forecast
Searching for cash in desperate times can be disheartening, so be prepared for shortfalls in advance. Estimate cash inflow and outflow for a couple of months, analyzing factors like sales cycle, delinquency rates, and terms and discounts. Do consider expenses related to purchasing new equipment, supplies and raw material, and schedule disbursements, tax payments and other daily expenditures.
Monitor your budget and strive to maintain cash flow on a regular basis. This will help you identify why cash inflow was less or greater than expected, and further make necessary corrections to your budget and business plan.
Keep Excess Cash Working
Don’t let surplus cash sit idle in your bank; deposit it in interest-earning accounts. Note that such accounts might require you to maintain a minimum balance, and that interest rates are usually lower than those applicable on savings or money market accounts or certificates of deposit. So keep the bulk of your money in higher-paying accounts and transfer the minimum amount to your interest-earning account monthly.
Keeping cash liquid is equally important, so refrain from investing in long-term plans!
Handle Receivables Diligently
Handling receivables diligently will help you stay on top of your potential income and thereby equip you to meet your obligations. Here are some tips you could use:
- Formulate clear payment terms.
- Have a system in place to roll out invoices promptly. Make sure invoices reach customers or clients as soon as orders are placed or within a short period of time.
- Make it easy for customers or clients to pay by offering various payment modes, including online ones.
- Request deposit payments at the time of order placement, especially for large orders.
- Consider establishing direct debit as a business norm to provide a stable cash inflow.
- Utilize subscription sales for your products or services. This way, you’ll receive cash to cover immediate expenses, plus secure future sales.
- Offer discounts for early payment.
- If payment isn’t received by the due date, follow up immediately.
- Track old customers or clients and identify slow-paying ones. Institute a cash-on-delivery policy for them or ask them for payment upfront.
- Require new customers or clients to pay by cash or credit checks.
- Double check invoices and ensure that purchase requests match with them. If there are any disputes, ask customers or clients to pay the undisputed amount and settle the disputed amount later.
- Get in touch with a business financing San Diego firm and sell your invoices for cash. While you’ll be charged a fee, you’ll be able to keep the cash flowing each month!
- You are unlikely to have the time or resources to pursue delinquent accounts. So sell old inventory to a debt collection agency for the highest price you get.
Eliminating or reducing cash outflow can reduce demands on cash. Here are some strategies to help you:
- Avoid buying equipment and choose to rent or lease instead.
- If you must buy equipment, purchase used. You’re sure to get a good deal at local auctions and if you buy from foreclosed companies. Make sure you’re not purchasing anything that will require you to spend a lot on repairs.
- Carry out regular equipment maintenance programs so you don’t have to replace anything costly. Avoid ordering factory parts and go for reconditioned replacement parts sold by third-party suppliers. Get repairs done by in-house personnel or sign an annual contract with a local repair facility.
- Don’t buy product upgrades the minute you’re notified about them; wait until it’s absolutely necessary to upgrade. Turn to open-source software or try a beta version, if available.
Expanding sales can also mean growing expenses. So examine costs carefully and manage payables with these tips:
- Making payments on time is a must if you don’t want to be charged extra fees. However, paying way in advance can use up free cash, limiting cash flow. So take advantage of creditor terms and make payments a couple of days before the due date. Better yet, choose an online payment method and pay on the due date!
- Some vendors may offer discounts on early payments; weigh your options before deciding.
- Communicate your financial situation to your suppliers in case you’re unable to make a payment. This will develop trust and probably help you avert extra charges.
- Don’t look for vendors offering the lowest prices, but settle for a vendor with flexible payment terms.
Sales and profits are certainly important for the success of a business, but if cash outflow exceeds cash inflow, the business is likely to fail. So focus on maintaining and improving your company’s cash flow; with the steps given here, you know how to get started!