How to Take Charge of Your Cash Flow

Essential Tips to Controlling and Keeping Your Cash Where You Need It

Cash flow management is critical to your business’s survival. Cash is king and nowhere is that more apparent than in the day-to-day finances of a business.

Poor cash flow planning can leave you short — struggling to pay employees or cover operating expenses. You may have plenty of business coming in, but it won’t help if you need funds now. Good cash flow management means you plan ahead and minimize those gaps.

Simply put, cash flow management is postponing capital expenditures as long as possible while encouraging anyone who owes you money to pay as quickly as possible. The first step to taking charge of your cash flow is evaluation.

Evaluate Your Cash Flow

No one can see the future, but an accurate cash flow projection is the next best thing. An accurate cash flow projection will break down in detail your accounts receivable, accounts payable, operating expenses and any other cash involved in the daily life of your business.

Create detailed projections for the coming year, the coming quarter and, if needed, the coming week. Cash flow projections record all the money you anticipate coming into, and going out of, your business for the allotted time. They are educated guesses that allow you to get a clearer picture of your financial situation and plan accordingly.

Be detail oriented when making projections and avoid the temptation to assume that past performance will mirror future performance. Yes, base your projections on past data, but don’t overlook things like capital improvements, maintenance, temporary hires and seasonal sales fluctuations. Find out how much cash you have coming in from customer payments, interest earnings, tax rebates and other sources. Knowing when the money will show up is just as important as how much, so be sure to include that information as well.

Improve Your Receivables

In an ideal world you would get paid at the point of sale, but in real life it rarely works that way. Your cash flow management goal for receivables should aim to improve the speed of payment.

  • Make a habit of invoicing immediately. You don’t want to be waiting on that payment.
  • Take a critical look at your invoice format. Is it clear and easy to read? Does it include key areas like due date, amount due, where and how to send payment? Do you have the name and email address of the specific person who will be paying your bill? You don’t want your invoice getting lost in interdepartmental shuffling. And it’s far easier to keep tabs on payment if you have a specific person to contact.
  • Look at your invoicing language. Are you offering “due in 30 days”, when “due upon receipt” is more appropriate? Keep in mind that automatically offering delayed payment terms amounts to offering short term loans – with your business footing the bill.
  • Require deposits on large orders and contracts. Building contractors might charge a 10% percent deposit upfront before beginning work on the project, a further 50% when they break ground and the balance due upon completion. This allows for payment of wages and suppliers during the project and helps minimize any potential bad debt.
  • Look into getting a mobile payment solution (PayPal One Touch, Apple Pay, Venmo, etc.) for your business. These apps allow you to get paid on the spot using your smartphone or tablet and your client’s credit/debit card. No time like the present to collect payment.
  • If your bottom line can handle it, offering early payment discounts can be a great way to incentivize quick payment.
  • Establish a written set of standards for credit eligibility and to enforce those standards firmly. The banks aren’t going to offer credit terms to just anyone and neither should your business. Offering credit can be a way to win sales, but if doing so means a cash shortfall it may not be worth the eventual payout.
  • Track your receivables to identify slow-paying customers. Depending on the level of non-payment you may want to avoid doing business with them in the future – or institute a policy of cash on delivery (c.o.d.).

Control Your Payables

Cash flow management for payables aims to keep your cash where you can use it as long as possible. If you are given 60 days to pay, why pay in 30 days? The longer you have access to those funds the better.

  • Set up an electronic fund transfers to make a payment on the last day it’s due. You get access to your cash for as long as possible. Your supplier is paid on time. Everybody’s happy.
  • Weigh the pros and cons of early payment discounts. They may end up being essentially an expensive loan to your supplier or they may actually cut down on your supply costs. Read the small print.
  • When choosing suppliers consider their payment terms – not just who offers the best price. A flexible payment plan can just as important (if not more so) than a low price to your cash flow.
  • Lease needed equipment instead of buying it. Purchasing big ticket items can put a tight squeeze on your available cash. Leasing allows you to upgrade easily and pay for the equipment in small monthly bites. And you can still expense the lease costs on your taxes. Anytime you can legitimately keep your cash, do it!

Plan to Manage Shortfalls

Shortfalls happen. No one can perfectly predict the future. Odds are good at some point your business will lack the cash to pay the bills. Taking steps now, before any issues crop up, can minimize the potential impact on your business.

  • Schedule monthly or weekly cash flow reviews. The earlier you catch problems, the more options you will have.
  • The best-practices recommendation is to have 3 to 6 months’ worth of operating expenses in cash reserves. This buffer can compensate for unexpected expenses — market downturns, accidents or hikes in supply costs.
  • Get a business line of credit before you need one. Banks are wary of borrowers who need money today. Going to the bank early shows you are planning ahead and have good management skills. You’ll get much better lending terms and usually a higher credit limit. Not to mention peace of mind.
  • If you’re in a crunch situation and bank loans are not an option, look to your suppliers. If you’ve been a good customer in the past they may be willing to delay payment or take a partial payment. They have a vested interest in your business’s survival and can be more willing to help then the bank.
  • Offer a slight discount on outstanding invoices in exchange for accelerated payment. Go after your overdue invoices and offer a deeper discount if they will pay right away.
  • Consider sale and leaseback financing. This financing option lets you turn assets into cash by selling heavy equipment, business equipment, vehicles and other assets to a leasing company and then leasing them back at a monthly rate.
  • Put thought into which bills you pay. Don’t just pay the small ones and let the rest slide. Pay the ones that are critical to your business’s survival first (payroll, essential suppliers, etc.) and ask for delayed payment options on the rest.

Cash flow management strategies can take time to set up, but once established will quickly become part of your routine. Remember, cash may be king, but you’re the boss.

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By Published On: January 24, 2020Categories: Business Advice