Cash is the lifeblood of a New York business, a New Delhi business and every business in between. In absence of a healthy cash flow, the business operations will come to a screeching halt. Cash flow management helps business owners create a balance between their net income and expenses. The balance ensures there is never a shortage of cash. Without proper cash flow management, business expenses can end up exceeding business revenues, leading to an unforeseen bankruptcy. To avoid unfortunate financial situations, every business should adapt and implement a set of strategies for cash flow management. In this post, you can find proven cash flow management methods for stable business finances.
Categorize Payable Accounts
Some small business owners make the mistake of paying all their monthly bills at once. They rely on the sales for getting them through every month. However, if there are low sales one month, there is no money to pay your accounts. This can damage your relationship with creditors and suppliers.
To avoid this, try to divide your payable accounts in three groups, gradually disbursing payments. For bills that you must pay immediately like rent, taxes, payroll and late utility bills, make these payments first priority. The second group consists of oil bills, utility bills and insurance payments. Generally, these bills come with a grace period for payment. If you are late for these payments, the penalty fees for late payments are modest. Lastly, the third group is made of suppliers, vendors and wholesalers, who readily offer flexible payment terms. Small business owners can communicate with the suppliers, developing a convenient schedule for paying invoices without having the need to define outsource work for the task. Dividing payment into these three groups will leave sufficient cash in your hand to better manage the cash flow needs of your business.
Calculate Working Capital Of The Business
First and foremost, evaluate the expenses of your business. When reviewing expenses, find out how much money is required as monthly working capital. This is one of the very basic steps for effective cash flow management. The amount of working capital your business requires depends on two factors. Firstly, working capital depends on the size of inventory you hold. Secondly, it depends on the amount of cash that your customers owe you. To properly determine the required working capital, you should also calculate the time gap between paying suppliers and collecting from customers.
Keep A Close Tab On Receivables
If you neglect accounts receivable, your customers are bound to take advantage of that. Take a look at the receivable amounts every week. Integrate a business accounting software to track outstanding balances. Additionally, you can dedicate a small team to contact customers periodically, following up on past due payments. Certainly, a strict credit policy can force customers to pay on time. Some small business offer discounts to the customers who pay up before time too. Whatever you have to do, collecting payments on time dramatically increases a business’ cash flow situation. You do not have to attend any of the top business schools to understand why this is so.
Build Rapport With Well-Reputed Credit Providers
You never know when your business will face a sudden financial crisis. In this case, cash flow can diminish quickly. This cash flow crisis tends to push the small business owners to their limits, making them desperate. To prepare for the rainy days, build good business relations with reputable creditors. Search for lending companies who offer working capital at modest interest rates and flexible terms. Then, build a rapport with them so you have cash flow in any unforeseen circumstances. As a result, this cash flow management strategy will ensure you can get cash even when a financial crisis occurs.
Enact Stricter Credit Requirements
In most cases, businesses will extend credit to their customers to build business trust and enable the business to grow. However, this can obviously prove detrimental to achieving or maintaining a positive cash flow. To prevent customer credit from causing a negative cash flow from your business, make sure your credit requirements are as strict as necessary. Vet your clients before you potentially lose money from offering them credit up front, no questions asked. Having stricter credit requirements for clients will help to build and maintain a positive cash flow for business.
When you require deposits, you can focus less on the bottom line and more on the finished product. This benefits your business and your customers. Some clients may be hesitant to pay a deposit. In that case, you may also want to consider milestone payments. Regardless of which you choose, both are effective cash flow management strategies to help you improve the flow of cash into and out of your business. Make sure you consider this.
For successful cash flow management, business owners have to balance receivables and expenses. They can certainly maintain this balance by carefully calculated required working capital and keeping back up funding sources available. Of course, these cash flow management strategies will hep you monitor and track business financials regularly. That way, you never have to worry about finding quick business loans at bad rates just to pay the bills each month.
Image from http://www.instantincome.com/news/overcoming-cash-flow/instant-income-plan