4 Cash Flow Management Tips That Will Blow Your Mind

Posted on: August 30, 2016 | Category: Cash Flow

Being able to manage your cash flow effectively and efficiently is a prerequisite in a smooth-running business. Some small to medium businesses all over the world are experiencing the fluctuating effect of cash flow mismanagement in their own businesses. When you run a business, automatically you also run the cash flow.

Both entities affect each other simultaneously and without properly managing both, your business would plunge down gradually without you even realizing it. Cash flow is highly relevant to all kinds of businesses. It’s like the fuel for a car, even when you try running it, it would stay in place without the fuel.

In managing your cash flow, there are elements that would always be present. First, the accounts receivable are the items and services that your customers and clients owe you. On the other hand, the accounts payables are the ones that you owe or borrowed from your suppliers. Last but not least is the shortfall that is propping up in a timely manner.

As the business owner, you should be able to manage these three simultaneously and in balance if you want to propel your business to success. Often time, the problem of most business owners is the dilemma of how to balance out the three. The three are co-existent with each other.

It would be a difficult drive but really worth it. Profitability would just be one step away if you get your system prepared in managing your business. Treat them as constructive obstacles that would serve as your ladder to success.

You should remember the saying that cash is the business lifeblood. Cash flows can either be positive or negative. It can also go against your profit or go with the flow of your business. It all depends on how you will handle it.

Measure Your Cash Flow:

If you really want to get ahead of your business, make an early projection of the upcoming business year. If you are really that persistent then you can even project the upcoming week. The question is what would you project? Of course, your cash flow. Projection of your cash flow would serve as your alarm when there is an onset of trouble in your business.

They are very effective signals even in a premature stage. Wouldn’t be good to know how’s your business going through a project it ahead of time. This step would even suggest if your expenses are already going overboard or if it is still manageable. Receivables are expected to push their way in the business so better come prepared and pack a lot of patience. So how can you effectively project your cash flow? This is thru adding your actual cash on hand with the upcoming and expected cash in your business. Think of all the sources of income for your business in doing this.

If you have your employees, try asking them and extracting information since they are the front liners in your business. They can witness the entire day-to-day transactions. Surely, you would be able to extract relevant information from them that would help in projecting your cash flow. Try to know also when that expected cash would be tangible.

Another way of doing this projection is through cash outlays. It means that you should know when the money should be used and on what particular are it would be allocated. Thinking of all these steps seems crazy but if you would really want to manage your cash flow effectively then there’s no option for you but to do it.

Try to Improve the Receivables:

As mentioned earlier, receivables are assets owed to you by your customers in the form of unsettled transactions and debts. There are considered as legal obligations shouldered by the customer. It could be enforced to have the claim.

If the customer paid you in cash then you need not to worry since it would it is instant cash, however, in most business transactions this is often not guaranteed. Even though it is in this way, your cash flow can still be improved. Making improvements in your cash flow is not that hard if you know on what areas you need to work on to. The key to this is to be able to convert the materials into actual products.

There are several strategies that you can apply. Offer discounts to your selected customers who can pay their accounts earlier than the usual time. This is sure to be an effective way of subtly forcing them to pay earlier. Try to observe it there would be a tangible result out of this scheme. Another way is to make down payments mandatory upon availing. It serves as an assurance also.

For non-cash transactions, try to enforce credit checks. In most businesses, this is made into a mandatory requirement before the customer could possess the item or the service. Take note of the inventory as well. Discard the old ones and replace it with the latest and the most updated figures.

If there are payments that you think are slower to be settled than usual, then make it a point to take the initiative to do a follow-up. Timely settlement of obligations would improve your insight into your business and would lessen your worries as well. The invoices should be really taken care of. Prompt issuance is the key. Aside from this, be sure to keep them in safe places. Separate them to other files and documents to not create confusion and lost invoices.

Cash flow management is easier to execute when the account receivables are easy to track. Many businesses have changed their policies into cash on a delivery basis to avoid encountering problems in terms of the settling of payments of your clients.

Manage Your Payables:

This is a similar concept in managing your account receivables. You should also be able to manage your payables. What are payables then? Payables are the money that you owed to any of your suppliers or distributors. It can be in the form of services or goods as well. This is a concept of the purchase of a particular business. You are the customer in this situation.

Be mindful of your expenses. Carelessness would cost you much in your business and would even be a cause of bankruptcy. If your sales are expanding, it doesn’t mean that your expense should expand also.

If your expenses are inflating in a rate compared to your sales then it is a warning signal for you to take a halt. If you are paying in terms, then try to pay it until the last schedule of the term. Don’t opt for earlier payments than the original schedule. It would just confuse your cash flow and soon you will lose track of it.

Another way is to make use of electronic fund transfers. It would be good to still be in current status. This is applicable for your expenses that are availed in terms or installments. Try to maintain an open line of communication with your suppliers so they would be updated of your financial status and it would be easier for them to adjust.

Choosing your suppliers can also be a good way in managing your cash flow. Sometimes, you get attracted by low offers and big discounts. Don’t easily fall into these traps. Choose flexible payment terms so would still have a good overview of your cash flow.

Maintain Liquid Cash:

The COVID-19 pandemic has taught company owners the significance of keeping a cash emergency reserve. Any tragedy, from COVID-19 to a catastrophe to family sickness, underlines the need for an emergency fund. A good goal is to have at least three months of company expenditures saved so that you may regain your standing or seek assistance.

Utilize Loans To Get Through Lean Periods:

A small business loan is an alternative method for increasing cash flow if you’re experiencing a temporary cash shortage. You would get cash in advance to cover expenses, wages, and other expenditures, which you would repay when your business meets up on consumer payments.

Prefer Leasing vs. Purchasing:

By leasing, business owners might sometimes avoid the high upfront expenses of new machinery and other capital expenditures. Leasing machinery or equipment for a predetermined monthly charge will allow making payments that do not deplete your financial reserves.
Consider the expenses of maintenance and repairs when comparing the advantages of leasing vs. purchasing company equipment. Many business lease agreements cover maintenance, so leasing may be preferable if you spend a great deal on technicians’ expenses.

Managing Shortfalls

Last but not the least, survive the phase in your business wherein you will lack in cash. It is quite common for businessmen to experience this. Almost all businesses have been there so what is there to be afraid of. Actually, this is just the cause of not being to foresee or predict the future shortcomings in your business. However, it doesn’t mean it is the end of your business. You just need to be resilient enough to surpass it.

Shortfalls are easier to manage when you openly accept them and acknowledge their existence. Diagnose it as soon as possible in order to prevent future collateral damage. Being caught short has some reasons behind it. Your expenses might be too overboard or there are unavoidable situations that occurred.

Keep your eyes open on what is happening in your business as well as in your cash flow. Know your plan ahead of time and have several backup plans. Backup plans can really be lifesavers. They can work wonders when everything went wrong.

If there seems to be no way out already, try leasing some of your operational assets like the spare machines and equipment. Another viable idea is the office itself. Many businesses are doing this especially if the finances are not doing fine. Some of them lease their offices in different time schedules just to tally the rental expenses with the profit.

All of these four are workable ways on managing your cash flows effectively. They may seem hard to execute, however, when routinely done, it would come naturally. Sooner or later, your business would be on its way to success. If you found this article helpful, don’t forget to share it.

FAQs:

Q. What is cash flow in a small business?

Cash flow measures the total cash that enters and leaves a firm within a specific period. When a firm has positive cash flow, it has more cash income flowing in than going out, allowing it to pay its bills and meet other obligations. When cash flow is negative, it is impossible to make these payments.

Q. What is the best way to improve cash flow?

One of the best ways to improve cash flow is by negotiating quick payment terms with your clients. Whenever your accounts receivables (cash inflows) begin to accumulate because customers are taking too long to pay, this may put you in a cash flow deficit, even if your firm appears to be pretty profitable on paper. Therefore, begin by negotiating conditions with your customers to achieve the earliest payment date.

Q. What causes cash flow problems?

A cash flow problem occurs when a company struggles to pay its obligations as they become due. The issue becomes critical whenever cash flow is constantly negative and cash holdings are depleted. Low earnings or losses are directly related to cash flow concerns. Remember that ultimately, the majority of loss-making firms run out of funds.

Q. Why is cash flow management important?

Cash flow management is keeping track of the money flowing into your company and comparing it to expenses such as bills, wages, and rent. It provides a comprehensive view of cost vs. income and assures that you have the finances to pay your expenses while still generating a profit.

Q. How to increase cash flow in business?

Some effective tips to increase cash flow in business include:

1. Negotiate prompt payment conditions.
2. Provide consumers with rewards and punishments.
3. Check your conditions of accounts payable.
4. Reduce wasteful expenditure.
5. Prefer leasing vs purchasing.
6. Examine your cash flow trends.
7. Maintain a prediction of cash flow.