Cash is king when it comes to the finances of growing companies. It is the key to the ongoing success of every business. Without cash, profits are meaningless. However, managing it effectively is one of the biggest challenges most business owners have to face.
Companies that do not practice proper cash flow management may not be able to make the investments necessary to compete, or they may have to pay more to borrow money to function. As a result, many profitable businesses on paper have ended up in bankruptcy.
Whether your business is experiencing a slow season or another large-scale business disruption, having an effective cash flow management plan can be the difference between success and closing your doors for good. This guide provides tips on how to improve your business cash flow and set a solid foundation for future success.
What is cash flow management?
Before going for the tips, let’s have a brief understanding of cash flow management. Cash flow management refers to the process by which an organization maintains control over the inflow and outflow of funds. The fundamental purpose of cash flow management is to ensure that the inflow of funds is always greater than the outflow so that the business is in surplus.
In other words, when you have more money coming in than going out, then your business is in a positive cash flow position or 'in the dark.’ Otherwise, when more money goes out than comes in, your business is at risk of being pulled over or in debt, so you need to find alternative sources of income to cover this overdraft.
10 tips for better cash flow management
Here are seven working tips for successful cash flow management your business can leverage at any time.
1. Get your books in order
The first step towards effective business cash flow management is to organize your books, so you know exactly how much money is going into your business versus how much money is going out. However, instead of using a spreadsheet and updating cash in and out at a later time, keep your accounts and balances up to date by automating these entries in accounting software. This will not only help to eliminate any surprise drops or cash flow spikes but will also give you a better understanding of your business, plus quickly identify opportunities or areas for improvement.
2. Perform a cash flow projection
Next, prepare cash flow projections for the coming year. This is your early warning system for cash flow hiccups. Use ScaleOcean Accounting to enter expected monthly cash inflows and outflows, including anticipated big-ticket purchases.
Use projections to anticipate slow periods and plan ahead what to do about them. Throughout the year, check your actual cash position regularly—once a week or a month—against your projections to see how you are performing and quickly address any discrepancies.
3. Keep up with invoices
If your slower paying customers continue to pay later or don't pay at all, be sure to contact them immediately to shorten the billing cycle. To avoid payment gaps, be sure to submit an invoice as soon as your service is completed, or the product is shipped out. Again, streamlining your billing process will help keep the money coming in quickly.
4. Only deal with customers who have a good credit history
It's a good idea to check customer credit first and keep track of their payment practices throughout your business relationship. One way is to check it online, or you can purchase status reports from credit agencies. You might get full customer details and financial results along with the payment experience of other suppliers, county court judgments, and a recommended credit rating.
5. Offer small discounts for early payments
The best way to do this without disappointing your clients or customers is to offer sales discounts and benefits to get them to pay faster. Of course, the amount is entirely up to you and depends on your financial capabilities.
For example, if you offer a 30-day credit term, you can give your customers a 5% discount on their invoice amount if the bill is paid within ten days of receipt. Otherwise, the full amount will be due at the end of the 30-day credit term.
6. Build up cash reserves
If you need more money, it never hurts to go out and try to attract new customers or sell additional goods or services to your existing customers. However, new customer acquisition can take time and money (to convert prospects into sales). Selling more to existing customers is cheaper.
An easy way to free up cash quickly is to sell slow-moving or excess inventory at a lower price or by using incentives for customers (such as loyalty programs to encourage sustainable business). Be sure to adjust your inventory purchases to expect business-level increases and consider changes in order lead times.
7. Negotiate with suppliers
Another effective business cash flow management strategy is to ask your suppliers if they are willing to extend their payment terms. For example, if a supplier requires payment within 15 days of issuing an invoice, politely asking if they can extend their term to 30 days means you will have more cash in the bank to cover your own expenses in the meantime.
You can also try to ask your suppliers for discounts on products and services that you buy regularly. Even small discounts can add up over time and have a huge positive impact on your overall financial situation.
8. Avoid overusing corporate credit cards
The problem with corporate credit cards is that unless people are incentivized to properly allocate fees to the client in question or into the business, you will struggle to have proper expense records. If there is a delay before an allocation is made to a client, who will be billed for the expense, your business covers the costs temporarily.
9. Improve the way you use bank accounts and overdrafts/loans
Bank overdrafts are a popular resource for short-term closing gaps in cash flow, providing additional cash when needed, and allowing unexpected expenses to be dealt with quickly. Make sure your overdraft limit size fits your needs – too small won't solve cash flow problems, too big can mean paying unnecessary fees.
Bank loans offer a flexible alternative and are usually cheaper with planned repayment schedules and lower interest rates. Some high-end lenders will even advance a lump sum against future cash flows, not just assets. You can try to negotiate a loan or overdraft facility with your bank when you are in a strong cash position, before you need it, as you will get a better deal.
Another useful process that some banks offer is the so-called 'sweeping.’ When checking account funds are low, you often don't have time to wait for transfers to add to them from your savings account, which may require a notice period. The solution is to set an inward sweep from one to the other, which is triggered when the current account balance drops below the specified value.
10. Cut costs and spread payments
Simply put, you can increase your cash flow by not buying items unless they are important to your business, and you can spread payments instead of taking them all out of your cash flow. Likewise, avoid tying up cash in large expenses if necessary, especially when it comes to vehicles, computers, and other business hardware.
Note: You can use your cash flow statements to do a cash flow analysis and see whether there are any recurring expenses you could cut back on.