Your cash account and cash flow provide two vital measures of the success of your business. The term cash flow management refers to the balance between the outflows of money from your business to pay rents, suppliers, vendors, etc. and the inflows from any party which owes you money. Ideally, you strike a balance of waiting as long as possible to pay your bills without being late and without jeopardizing your reputation and encouraging those who pay for your products or services to do so as quickly as possible after delivery of the goods or services.
While it takes time to develop the savvy to deftly manage these finances, you can use the tips to efficiently learn. Start with these four main practices.
Accurately Measure and Project Your Cash Flow
You can project what bills you have due and when. You can also project your earnings and when you will receive them. The only exception to that is the first month a business exists. Otherwise, you base your second month’s projections on your first month’s earnings, your second quarter on your first quarter, your year three on year two, etc. As you amass time in business, you amass the ability to prepare more accurate cash flow projections. You need these by quarter and by year, at a minimum as mentioned over here. If your business just began or has hit a rough patch, create weekly cash flow projections.
Your cash flow projections and plans are not the same as earnings forecasts. When examining cash flow, you create a forecast, not of mere sales, but a document that incorporates your customers' payment histories, a comprehensive calendar of impending expenditures and the payment windows of your vendors. You must justify any financial assumptions that your firm’s receivables will continue at prior rates or exceed them. While you may also develop sales growth estimates and projections, they do not provide guarantees. Account for seasonal sales fluctuations and budget for capital improvements and loan payments.
Begin the cash flow projection with cash on hand at the period’s outset. Add cash expected/due from other sources. Do not limit yourself to sales figures, but also include items in collections, partial payments of bad debt, interest earned and other incoming monies. Next, add the amounts, dates and reasons for upcoming cash outlays. Projections need line items.
Improve Your Receivables
Once you have in front of you what comes in and what goes out as well as an idea of when you can improve your situation. Ideally, you would get paid the moment you make a sale. Cash flow problems solved then. Few businesses have that lucky scenario. You can improve though by increasing the speed in which you make raw materials and supplies into products, then move products to the sales floor. Your inventory turns into receivables. Receivables bring you cash. You can handle these numerous ways.
- Improve manufacturing techniques and procedures.
- Offer customer discounts to individuals who pay their invoice before it is due.
- Request or require deposits when a customer places an order.
- Conduct a credit check on new non-cash customers.
- Sell old inventory at a discount.
- Promptly issue invoices. Follow up immediately if you do not receive payment quickly.
Identify customers who pay slowly or late. Use cash on delivery policy for customers who pay slowly or late. This lets you keep the customer, but avoid the additional costs of having to re-contact them for payment.
Proper Payables Management
Keep expenses to only those necessary. Budget, budget, budget. Your sales growth can trick you into complacency. Expanding sales cannot solve a problem permanently if spending has gotten out of hand. Cut or control costs.
- Pay bills when they are due, but not late. Do not pay exceedingly early either.
- Set up an automated payment to transfer funds on the due date.
- Keep the lines of communication open with your suppliers. If you know you will be late paying, you can request a delay in payment.
- Consider using early payment discounts your vendors offer. Read the details and only do it if it genuinely saves you money.
- Choose a combination of suppliers that offer low prices and flexible payment terms.
Surviving Cash Shortfalls
Eventually, a bad cash forecast finds you without cash to pay business bills. This happens to virtually every entrepreneur at least once. You can learn to manage shortfalls while things are good, so you know what to do when the inevitable happens.
By keeping a close watch on your cash flows, you can easily detect when you begin to enter perilous fiscal issues. You can more easily borrow money while you do not need it. Financial institutions typically loan you money more readily and at better interest rates when you already have money. Arrange for a line of credit while you do not need it. Do not use it until necessary.
Talk with your suppliers and vendors to negotiate extended terms or permission to miss a payment. You can also collect from invoices not due for weeks by using factors, financial services that pay a business for it receivables due. The factor takes about 15 per cent, but you get all the money due you all at once with no delay. If that does not appeal to you, contact your top clients and ask them to accelerate payments, offering them a discount for paying early. Collect from late customers. Offer them a discount, too. Finally, you can sell assets like equipment and office furniture. You can lease replacements when you need them.
Pay what you must first. Employees are always paid first. You will lose them otherwise. Next, you pay the most crucial suppliers. Others you negotiate with to find an amenable payment plan.
You can keep your business liquid. It takes planning and budgeting, but once you learn how to manage money effectively, you can more easily grow your business.