Cash flow management

Zahn Abreu Entrepreneurial Tips for Enterprises Leave a Comment

What is cash flow?

Cash flow talks about the movement of money through your account. It refers to the actual cash that you have on hand. It does not include the money that has not yet been paid. Cash flow can fall into three categories:
  • Operating Cash Flow. This is known as working capital. It is the money spent on inventory and operations
  • Investing Cash Flow. This is money spent on equipment, property and other assets.
  • Financing Cash Flow. These are based on financial deals.

What is cash flow management?

Cash flow management is the process of monitoring, analysing and optimising income and expenses. This is an important measurement for any business, especially small businesses. Businesses can fail due to poor cash flow management. Careful cash flow management allows the business to estimate the amount of cash that you will have on hand at any one point. It’s encompasses the projection of cash inflow and cash outflow and helps assess if there will be a surplus or shortfall.

The importance of cash flow management?

The aim for your business should be to make more money than you spend. You should also aim to not spend more than you aim to make. Having a firm grasp on cash flow management is essential for the success of your business. Managing your cash flow puts you in the drivers seat. It means that you have control of where your company is headed. You will know what you have in reserve and what to reinvest in your business. It will help you predict future ups and downs and plan accordingly.

Some tips on managing cash flow

Improving receivables

If you were paid the minute you made a sale, you would never have a cash flow problem. However, this does not happen. You are often paid in increments or when the job is done. The aim is to manage your receivables. Here’s how you can do this:
  • Offer discounts to customers who pay their bills rapidly.
  • Ask customers to make deposit payments at the time orders are taken.
  • Do credit checks on new non-cash customers.
  • Get rid of old, outdated inventory for whatever you can get.
  • Issue invoices promptly and follow up immediately if payments are slow in coming.
  • Track accounts receivable to identify and avoid slow-paying customers. A policy of cash on delivery is better than not doing business with slow-paying customers.

Managing payables

Watch expenses carefully. Don’t think that increased sales means increased cash flow. If your expenses are increasing faster than your sales, examine these costs. Make sure you manage and control them. Here are some tips on using your cash more efficiently:
  • Take full advantage of creditor payment terms. If a payment is due in 30 days, don’t pay it in 15 days.
  • Use electronic funds transfer to make payments on the last day they are due.
  • Carefully consider vendors’ offers of discounts for earlier payments. These can amount to expensive loans to your suppliers, or provide you with a chance to reduce overall costs.
  • Don’t always focus on the lowest price when choosing suppliers. More flexible payment terms may improve your cash flow more than a bargain-basement price.

Survive shortfalls

You may find yourself in a situation where you do not have the cash to pay your bills. There are ways in which you can manage these shortfalls. Become aware of the problem early on. Banks may prefer lending money to you before you need it. If you see that you are running risk of not meeting your payables, request a loan in advance, before you run out of money. Set up a line of credit with your bank so that you can borrow money as and when you need it. You can also ask your customers to accelerate their payments. Explain your situation is necessary and offer a discount should they pay you on time.
In conclusion, an important tool for planning ahead is a cash flow forecast. You can usually aim to do this for a year in advance. This will help you evaluate how profitable future sales will be. It can provide an overview of what needs to be done in order to achieve your goals. Keep your business financially strong in order to ensure its success.

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