The ultimate success of a business relies on more than just profitability. A financially healthy business stands on a prudent cash flow management policy. Whether you have an emerging company or are looking to enter new opportunities, if your cash is tied up in receivables or poor inventory management, even higher profits will do your business no good.
Your cash flow situation helps you plan realistic business goals – from fixed asset investment to business expansion to scaling operations, positive cash flow makes these decisions easier. But what is cash flow management?And how can you ensure a healthy cash flow for a sustainable business? Let’s get into the details.
What is cash flow management?
Cash flow management is a strategy to monitor, analyse, and optimise the net cash flow of the company.Cash enters the business in three ways – from operations, finance, and investment. A positive cash flow means you have more money coming into your business than going out, and this is precisely where you should aspire to be to survive in the long run.
So, to help you master the practice of proper management of cash,here are 6 tips for a streamlined cash flow.
1. Understand your cash flow pattern
The first step to a favourable cash flow situation starts with a cash flow analysis and forecast. Your business cash flow is the result of several factors, including inventory, accounts payable, receivables, capital expenditure, and more. It is critical to analyse your past cash flow statements to identify cash flow trends due to these activities.
For instance, if your revenue during the past few months is high, but you’re still facing a cash crunch, it could point to poor management of cash.
Further, you can use these insights to prepare a cash flow projection for the next few months. A cash flow projection will anticipate the movement of cash in the business and help you plan your expenses ahead.
2. Fast-track the recovery of receivables
Accounts receivables make up a significant part of your business cash flow.But the longer your customers take to settle their payments, the longer you will have to manage on a lower cash balance. So to ensure better management of receivables, it is best to have a credit policy in place.
If you offer credit, conduct a credit check on your new customers, and establish clear payment and penalty terms for new customers. You can further improve the cash flow in your company by requesting advance payments or offering cash discounts to encourage settlement before the due date.
3. Set up a cash reserve fund
No matter how diligent you are with your expenses, the risk is an inherent part of any business. But setting up a cash reserve fund allows you the flexibility to meet unplanned expenses and help the business sustain itself during an economic crisis.
To ensure effective management of cash during uncertain times, make sure to have enough cash to last you for at least three to six months.
4. Delay account payables
While you want to bring in receivables quickly, follow an opposite strategy for account payables. One of the ways to extend your cash flow cycle is by extending your payables as much as possible. Negotiate with the supplier for liberal terms – try and time your payables with the receivables to balance the cash flow. Additionally, make the most of the available credit period to delay the payments for as long as you can within the credit terms.
Moreover, keep track of your business expenses and prepare a budget to ensure you’re not incurring any unnecessary costs.
5. Focus on better inventory management
When planning cash flow optimisation, businesses often overlook the cash amount in the form of inventory. Maintaining higher inventory levels can block up cash, which could have been easily invested elsewhere. Not to mention, it results in higher costs of managing the stock, further putting your business at a major disadvantage.
To avoid this, maintain only an optimum inventory level that you can expect to liquidate quickly. Analysing the expected demand before investing in inventory will help mitigate the risk.
6. Consider borrowing
Since your business needs a constant flow of cash for smooth operations, opting for a business loan will be a smart choice. Whether you want to meet your working capital needs or streamline the cash flow of the company during peak season, a business loan will offer you instant availability of funds at flexible terms.
With these funds, you can easily bridge the gap between payables and receivables and ensure more efficient management of cash.
The bottom line
Managing a healthy cash flow situation is a challenge faced by many businesses. Delayed receivables, blocked inventory, and improper cash planning can quickly result in negative cash flow. Fortunately, affordable business finance can help ease your worries.