Why is cash flow so important for a business? A simple answer to this question is that without proper cash management, no business can survive. Improper cash management can lead to trouble with creditors and ultimately to bankruptcy.
It is important for you to understand cash flow because it allows you to make wise investments and protect your company’s growth. Cash flow management is all about balancing the cash coming in and going out of your business. Proper cash management will allow you to rely less on debt financing.
8 Cash Flow Strategies for Your Business
You can implement some of the following strategies to improve the cash flow of your business:
1. Regularly Forecast Cash Flow. It is critical to regularly forecast cash flow for a minimum of three to six months to avoid shortfalls. Poor cash flow management could lead to business failure. A good starting point for projecting your cash receipts is to forecast your sales. To do this you will need to work closely with your sales, operations, production and marketing teams.
2. Invoice Promptly. One reason that small businesses can face a cash crunch is that they do not issue invoices soon enough after a job is complete. Simply put, if you don’t invoice in a timely fashion, then you won’t be paid. Delayed invoicing happens because most small business owners perform the majority of business duties themselves as a result, they don’t have sufficient time to promptly do their books. However, you must remember, if you wait two to three weeks to issue an invoice, then it will take another three to four weeks before that cash arrives. Consequently, it will put pressure on your cash flow. To help with this issue, there are many free online invoicing software programs available, such as Wave Accounting and FreshBooks. These cloud based accounting software programs, offer free and paid versions and provide easy access to prepare invoices from anywhere at any time.
3. Receivable Collection. To speed up the collection of accounts receivables, companies can offer discounts to customers; 2 percent, or net 30. This will encourage customers to pay their bills quickly. Other strategies are to offer customers a fixed payment plan and accept various methods of payment such as credit cards, PayPal, Interac e-Transfer, EFT and cheques. For large orders, it is a good idea to ask for a 50 percent deposit in advance to pay for the material related to the job and rely less on lines of credit or other financing options.
If you’re working with larger corporations, learn about their payment cycle. Find out the last day for getting an invoice approved and included in the payment run. Check with the payables department a couple of days in advance to make sure that they have all the necessary paperwork from you that they need.
4. Managing Inventory. Don’t invest too much in inventory without understanding supply and demand.. Prioritizing your inventory needs and maintaining them effectively is critical to controlling the cash flow gap. Inventory turnover ratio can be calculated on a regular basis to determine a trend by analyzing which items have been sitting on the shelves for a longer period of time and becoming obsolete. Once you determine which product is more in demand, you will be able to balance needs with costs by carrying only as much as you need of a given product.
5. Payables. Take advantage of payment terms offered by your suppliers. If the supplier is offering you a discount, calculate the opportunity cost to see if the savings make sense. For example, compare it with the interest you will pay on the line of credit if you’re utilizing it to pay the bill or any other investment opportunity. A proper cash flow forecasting system will help you solve this dilemma.
6. Fixed Cost and Variable Cost. Split your expenses into fixed and variable expense categories, this will help prioritize your cash flow. Then, scrutinize your variable expenses to see what impact reducing or eliminating them will have. Ask yourself – will this hurt or help my cash flow and business overall?
7. Purchase vs. Lease. If you need to purchase major equipment, do a financial analysis to see whether you should buy or lease it and how each option will affect the cash flow.
8. Use of Technology. A dashboard reporting system is a powerful tool to see all your major key performance indicators (KPIs) on one page. You can incorporate cash flow forecasting into dashboard reporting, which can serve as an early warning system to determine cash shortfall.
Cash is King
The premise of the popular phrase ‘cash is king’ is that having cash puts you in a position of better buying power. However, while having cash on hand is critical, your cash flow indicates an ongoing ability to generate and use cash. It is one of the most valuable measures of strength, profitability and the long-term future outlook for your business.