While many business owners understand the value of sales and profit, they may not know the importance of cash flow management. Understanding operational cash flow is critical to reducing debt and improving business efficiency. For example, a high-profit margin business may still have low cash flow that may result in overspending and other financial issues.
In simple terms, cash flow is the money that enters and leaves your business. But when properly structured, cash flow may help a company develop greatly. It can help the company save money and streamline its essential functions.
Here are some tips for managing cash flow for business owners.
- Borrow Money
Preventing cash flow issues is the best strategy. But changing market conditions can affect you at any time. Like a personal emergency fund, every business should have cash on hand to cover working capital shortfalls or unexpected expenses. Prepare a backup plan: borrow money before you need it. What if something happens that puts you in a cash flow crisis? A well-thought-out backup plan can give you peace of mind and a financial reserve in case of need.
Moreover, opening a business credit line when your figures are good reduces the probability of future rejection. It will also provide you with resources to fall back on if you run into any financial issues.
If you don’t have any credit cards yet and are having trouble receiving a loan, a small company credit card with an interest-free grace period may help. Credit cards can help you save, and many offer innovative reporting features to help business owners improve their cash flow.
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- Maintain Strict Credit Policies
If you give credit to customers, stick to your policies to ensure you are paid on time.
Try these ideas:
- Keep track of late payers and impose a cash-on-delivery policy on repeat offenders.
- Send bills punctually, confirm receipt, and follow up immediately on late payments.
- All new customers should be subjected to a credit check before credit extension.
- Minimize Account Payables
When evaluating your cash flow statement, keep an eye out for spikes in accounts payable, often known as your bills. If you’re aware that your accounts payable has increased, but you don’t have enough cash on hand to pay for invoices, you must develop a strategy to address the issue before it destroys your organization.
Rather than shortening the time it takes for customers to pay, you want to extend the timetable for accounts payable and keep money in the bank.
Payment of your bills should be scheduled for the day before they are due. It is the standard set by professional organizations such as utilities and credit card firms.
Your objective is to get paid as early as possible and maintain your funds for as long as possible without jeopardizing your credit or reputation. Not attempt to escape payment; avoid paying invoices a month early unless necessary.
- Use Cash Flow Management Software
Many software tools exist to manage, track, and forecast cash flow. You may already have the cash flow software you need if you use small business accounting software. Cash flow forecasting reports are built into cloud accounting software like QuickBooks. Others offer cash flow management add-ons.
Many cash flow management, forecasting, and budgeting software products can directly interface with popular accounting software products.
- Liquidate Non-Performing Assets
Do you have any old equipment or inventory you no longer need or want? Consider turning them into cash by selling them. Inactive and non-working equipment wastes space and money. When the book value of long-held equipment exceeds the salvage value, a tax gain follows. The loss might be offset against other company profits if you sell below book value.
Customer demands or advanced technologies may evolve, rendering surplus inventory unusable. Consider selling unused goods in the next 12 months unless keeping them is not costly.
- Forecast Expenses And Profit
Businessmen are usually pressured to be hyper-focused on the here-and-now issues, but they also have to prepare for the future. They should estimate payroll and other expenses, factor in the quantity and timing of invoices and bills that need on-time payment, and forecast earnings for three, six, and twelve months out.
By planning, a business owner may be proactive in managing cash flow – achieving a balance between getting payments quickly and, if necessary, postponing payments to vendors.
Conclusion
Cash is crucial in any business. Remember that cash outflow is never a problem; money will always flow out easily. The tricky part of managing cash flow is keeping it going consistently. Following the above advice will help you maintain a positive cash flow.
