How to improve your business cashflow management
Irrespective of the size of your business, one of the fundamental keys to success is being able to effectively manage your cash flow. Even the most profitable business can fail if adequate attention and resources are not delegated to developing a functional cash flow management strategy.
When your company is generating sales and shipping high volumes of product, a large amount of your cash can be tied up in operational and delivery costs. A fast growing company will require increased amounts of cash as the product demand increases, more stock is purchased and more staff are hired.
All of these factors put a premium on managing a company’s cash flow and diligence is required to avoid the dreaded cash crunch. There are a number of practices and strategies that may be considered to increase cash flow;
• Using cash flow forecasts. Especially if a business is seasonal, knowing what the next 30/60/90 days of cash inflow and outflow will be is the first step. Staying on top of cash flow by carefully tracking expenses and receivables is crucial. Sometimes it takes a phone call to customers late on paying their bill.
• Managing stock. One real money pit is excess inventory. Finding the right balance to meet demand while keeping stock purchases under control is essential. It’s important to keep a close eye on stock levels as they have the potential to eat up a lot of cash.
• Managing trade accounts. Negotiating the very best terms with vendors is a major cash saver. Be aggressive in seeking the longest period to pay. The difference in 30, 45 and 60 day terms can make a significant impact on cash needs. Vendors who won’t be flexible on terms may need to be replaced.
• Avoid needless expenses and penalties. Paying taxes and bills on time will avoid high penalties and interest charges. Be sure to consider all potential tax payments as to avoid a large unexpected bill.
• Minimizing personal use of cash. Failing to account for withdrawals from business accounts can create nasty cash flow surprises. Remember – The cash till is not a personal piggy bank.
• Be smart with credit facilities. Use credit and debt tools to finance your business when appropriate and necessary. Credit serves an important role in business when used wisely and with careful planning.
If a company faces a cash flow crisis, it will have to bring in additional financial assistance which is generally in the form of either debt or equity financing. Relinquishing equity in a company is often seen as a practical decision, although every possible alternative should be considered before making such a decision.
Turning to debt can take a number of forms. Occasionally large company suppliers will extend terms to ease the immediate cash needs, and banks will readily offer financial support to established and profitable companies. Setting up lines of credit can be a tedious job and relatively new companies may not qualify.
Another financial option for businesses requiring cash flow aid is debtor finance. Debtor finance institutions act as an agent between the debtor and the selling company by purchasing unpaid invoices. The debtor financing firm charges a fee for the service, discounted from the amount paid for the uncollected invoice. The use of such firms can be a powerful and beneficial financial tool for a small or midsize company.
Whilst it is always best to plan and avoid cash flow issues, creative solutions are available if the crunch does come.