Improving cash flow management is a wise decision for any organization, at any level of development.
It makes no difference how excellent your products, services, and solutions are if your clients do not pay for them. There is no other aspect of your business that you could concentrate on that will have such a significant impact as cash-flow.
Few new or developing businesses have a large cash reserve to cover shortages since they must constantly reinvest just to stay afloat. When it comes to cash flow, these are trying times.
One of the most important reasons why it is so difficult to get a new firm up and running is poor cash flow management.
The quantity of money, both cash and non-cash, that flows into and out of a business is referred to as cash flow. A positive cash flow is defined as more money coming in than going out, while a negative cash flow is defined as less money coming in than the business needs to pay its outgoings.
A business calculates cash flow by taking note of the cash available at the start and end of a certain period, this can be variable. If there is more cash in the account at the conclusion of the period than when the period began, the firm has a positive cash flow; if there is less cash at the end, the business has a negative cash flow.
Every business should regularly watch its cash flow since even the most lucrative companies can suddenly run out of cash, with disastrous results.
Here are some simple pointers:
Spread your payments and extend payables as much as possible.
Align your payroll cycle with your revenue cycle.
Negotiate payment arrangements with suppliers; longer payment terms may be preferable to cheaper rates.
Do not be afraid to refuse credit.
If you don't have the time to chase down debts, consider invoice discounting or factoring.
Maintain correct credit rules; until a consumer pays, you have not sold them anything.
If the interest rate on a business credit card is cheap, use it.
Think about getting a credit line.
Profitability is not the same as cash flow. Even though a company is lucrative, it may be unable to pay its debts. It is also true that simply because a company meets its financial commitments does not mean it is profitable.
Finally, managing cash flow is all about timing. You may be profitable over a month or a year, but not over a single day or week. If your bills are due at the beginning of the month but you won't have any money in the bank until the end of the month, you have a cash flow problem, even if you made more than you spent at the end of the month.
Here's the thing about profit: if you're not profitable on paper, you're in trouble. If you want to stay in business, you must either raise your revenue or cut your expenses.
However, just because you're profitable doesn't imply your company can operate on autopilot. You should still practice cash flow management, even if your company is expanding.
Plenty of profitable businesses have gone out of business as they ran out of cash because they “sold” products and services but never got paid.
Although it may appear scary, cash flow control and emphasizing excellent cash flow management have substantial advantages.
Forecast shortfalls
The first and most obvious advantage of managing cash flow and working capital is predicting when you will have gaps. Don't discover you can't pay your rent after the check bounces. With a robust system in place, you may foresee deficiencies weeks, if not months, in advance, giving you time to devise a solution.
As an example:
Call your landlord and urge them to cash your check a few days later.
Delay a shipment by a couple of weeks to avoid paying duty at customs.
Run a campaign to generate additional sales rapidly.
Reduce your stress.
Managing cash flow, believe it or not, will relieve a lot of stress. Much of the stress that entrepreneurs feel when it comes to paying expenses stems from not knowing what's going on and not knowing whether or not things will work out.
Even if the outlook is bleak, knowing what's coming is preferable. You'll feel more prepared once you know where you stand. More importantly, you'll be prepared to handle it.
Know when to expand
When you manage cash flow, you know exactly how much money is available for growth. Remember that just because your profit and loss statement shows you have excess cash on hand does not guarantee it will appear in real life.
Similarly, having $20,000 in the bank does not imply that you can spend it. You may require it to cover upcoming expenses. When you look at your cash flow over the course of several weeks or months, you'll know how much to keep on hand and how much you can tuck away or spend on growth.
Gain advantage
Effective cash flow management provides you with leverage. A robust cash flow management system will back you up and establish trust if you need a line of credit from the bank to get you through a shortage or if you want to ask a supplier to give you a break for a few weeks without halting service.
Banks often appreciate this type of preparation, especially if you can clearly demonstrate when you will be able to repay the funds. Suppliers are considerably more likely to be flexible if you tell them exactly how and when you'll pay, rather than stopping communication as most businesses do during difficult times. These folks want your business and will be more likely to work with you through the ups and downs if they can put their trust in you.
More Precise
A cash flow forecast is far more accurate than a budget. Budgets outline your desired outcomes. They're wishful thinking, and entrepreneurs are naturally optimistic. Cash flow projections inform you what is actually happening so you can cope with it—even if it differs from what you expected at the start of the year.
Most of us (including myself) would rather not think about managing cash flow and just hope everything works out. However, the danger is not worth it. Staying on top of your finances will make you feel much better.
As well as not making the mistakes listed above you should:
Encourage customers to pay early; this makes a huge difference as very few Ecommerce stores that take payment up front have cash-flow problems.
Consider factoring or invoice discounting; especially if you have decent profit margins but your customers are big businesses that pay slowly.
Take as little cash as you can out of the business personally.
Manage your stock - if certain stock is not selling then forget what you paid for it and get what you can.
Manage suppliers. Suppliers would much prefer you remain in business than you go under and they do not get paid; far too many business owners never even talk to their suppliers to see if they can help.
Consider your other assets and investments.
Re-forecast your cash flow every week / month based on real numbers. This is vital to ensure that you are not drifting towards disaster.