When it comes to running a business, cash is the lifeblood. This means that your business’s financial management will determine whether your organization would sink or float. Cash flow management is basically how you can balance your payments to your suppliers and your employees, and collecting payments from your customers. Basically, you should aim at expediting cash payments and encouraging customers who owe you money to pay you as soon as possible.
1. Measure your current cash flow.
In order for you to understand exactly how your business stands, you must first measure your cash flow. You can make cash projections for the next month or next year, or if things aren’t doing so well, for the next week. Your cash flow projection will help you when you’re trying to steer your business away from the rocks.
Your cash flow projection should be based on a number of variables including your customers’ payment histories, how keen you are at identifying expenditures, and how long you can stretch your vendors’ patience when it comes to settling your accounts. However, you need to be very precise with how soon you can get your receivables as well as how far off you may delay your payments.
While you’d want to come up with an arrangement that works best for you, your relationships with your buyers and your suppliers are still what you want to put first. At the same time, seasonal fluctuations can also cause you to become cash-strapped while still needing to meet your obligations to your suppliers.
Your cash flow projection should basically include not just how much you’ll be receiving or paying, but also what each cent that moves through your hands is for. Make sure that you have your overhead costs labelled and sorted out.
2. Improve the manner that you retrieve your receivables.
If every transaction you had with your customer was done so that you get your money right away, then you wouldn’t have any problem with your receivables. However, this isn’t always the case in certain businesses especially when you operate in the service industry. This does not mean though that you cannot encourage your customers to pay you right away.
You can give special discounts to customers who pay upfront or offer freebies to sweeten up the deal. To protect you, you can also do credit checks on noncash customers prior to them making their initial transaction with you.
3. Manage your payables.
When it comes to settling your accounts, you should always take a look at your expenses. Just like in making a family budget, your expenses should never be greater than the amount that you make in every month. You can also avoid being low on cash by sticking to the payment terms of your supplier as a rule. If your supplier gives you a 30-day grace period to settle your account, then do not pay during the fifteenth day. Stick to the agreed terms so that you can come up with a rhythm for when you pay your accounts and get money in.
Cash flow is the lifeblood of your business so managing it well will do much to help you keep your business thriving and growing.
Phil Farell is a finance writer who loves to give useful tips to overcome bad debts. He also shares his insights on investing, financial management and lease financing. His blogs currently feature several investment articles and jobs with Nick Scali