Business owners know that cash is king. But tracking cash flow, even in a small business, isn’t as simple as watching your bank balance. There are many moving parts that impact cash flow.
Making a $1 million sale doesn’t mean you’re in the black with plenty of cash is in the bank. For a view of your financial health, you need to stay on top of your cash flow. Monitoring your cash flow statements or using a cash flow manager to maintain your financial position, will ultimately help you to sustain your business health.
Your cash flow is what’s going out, as well as what’s coming in — any given month, week, or day. Making more than you’re spending? Great news! However, if you find yourself repeatedly in the red, it may be time to take action.
Having a deep understanding of your cash flow position helps you take strategic action. If you are prepared for a lag in sales based on historic data (for example, seasonal peaks) you’ll be able to identify in advance what expenses could be cut to mitigate the loss.
Even a growing, profitable business can go under if poor cash flow management fails to provide the necessary safety net. That’s why managing cash flow is vital.
We look at five effective cash flow management strategies and the metrics that can help you monitor them.
Receivables — commonly called accounts receivable — are debts owed to you by your customers for goods or services provided (but not yet paid for). Without a payment time frame, it’s difficult to plan and manage your cash flow. Consider the following:
Assess your invoicing process
Stay on top of invoicing. Send invoices as soon as work is complete and ensure that they’re straightforward, easy to read, and easy to pay. Review accounts receivable aging on a regular basis and reach out to customers who have fallen behind.
Consider reviewing your payment terms — even if temporary
Many businesses set the terms for payment at 30-days following raising the invoice. Depending on your business and your expected spending, you may want to adapt this to suit your needs. Is it possible to set up 15-day or even “due upon invoicing” terms with new or existing customers? Everything in business is negotiable.
People respond to incentives. Try offering an early-payment discount. For example, you could offer a percentage off the total. Or get creative and try free delivery, a free upgrade, or by offering a discount on their next order — stoking repeat business in the process. Whatever you choose, ensure that the cost of getting paid early is worth the cost of the incentive.
You don’t want to be a problem customer for someone else, but you can negotiate your payment terms. Review and familiarize yourself with the payment terms you hold with your suppliers. Research industry norms and negotiate where possible for mutually beneficial relations.
Don’t pay vendors early – unless it benefits you. The best way to avoid this is to have a good check run process — where payments are approved and executed to pay invoices in a timely fashion. If your business only pays vendors once a week, it might help your cash flow to pay twice a week. Consider the extra work and balance the administrative costs with cash flow benefits. If your business has enough volume, holding on to half of a check run for three days could make a huge difference.
Get a business line of credit
A business line of credit gives your business access to a pool of funds — similar to a credit card — and can be a valuable cash flow solution. Providing greater flexibility than a fixed-term loan, it gives you the flexibility to access capital when you need it.
You can use a business line of credit to finance short-term working capitals, for example, purchasing inventory, acquiring or repairing business-critical equipment, or bridging a seasonal cash flow gap.
If the corners of your stockroom stacked with unmoving boxes of slow-selling product, it’s time to review your inventory turnover by product.
Prevention is the best remedy. Invest in products that move quickly and are profitable — keep a healthy stock of these items on hand.
Get rid of the products not moving, even if you need to discount them. This provide an injection of cash to your business now and also decrease your carrying costs. With an inventory spring clean, you open your stockroom to new possibilities!
Lease, don’t buy
Leasing rather than buying may sound counter-intuitive to many business minds because, generally, it costs more to lease than to buy.
But leasing can make a significant difference. You eliminate down or full payments and avoid tying up your cash — and get access to the latest equipment. Plus, you will be able to expense the lease costs on your business taxes. It’s best to monitor this approach as business needs change and consider investing — when the time is right — for long-term business growth.
Try these strategies separately or together, if they seem right for your business. Understanding the importance of cash flow and how it differs from profitability is an important first step. Then, monitoring cash flow, and tracking how your business is performing across all areas, will support growth and reduce risk.