Cash flow is king
The survival of any business depends on cash – making cash flow the lifeblood of your business. Even if your business makes a healthy profit at the end of the year, you still need to manage the inflow and outflow of cash to survive on a day-to-day basis.
Forecast your cash flow
It's important to find out in advance the months when your business is likely to be short of cash. Then you can plan ahead and minimize the impact of cash flow problems.
Use a cash flow forecasting tool to track when and from where your business will receive cash – and how and when the cash will need to be spent. Forecast your business's cash needs for the next six or 12 months.
Improve your cash flow
Once you know how much cash you'll need and when there are likely to be shortfalls, it's time to improve your cash flow.
Manage accounts receivable proactively
- Carry out a credit check on each new customer.
- Improve your invoice system – consider introducing an electronic invoicing system so that invoices can't be lost in the mail. Add your bank details to invoices so customers can pay you by direct deposit.
- Invoice promptly – if you're working on a large project, invoice in installments rather than waiting until the whole project has been completed.
- Deposit checks in the bank as soon as you receive them.
- Consider changing your payment terms to 30 or 14 days.
- Chase up all unpaid invoices as soon as they become overdue.
Manage accounts payable effectively
- Negotiate favorable payment terms with new suppliers.
- Pay for purchases with a business credit card and benefit from the interest-free period known as "float."
- If you're in a strong cash position, take advantage of early payment discounts offered by suppliers.
- Use an accounts payable system to track when bills are due, ensuring that you pay them on their due dates, thus keeping cash in your business for as long as possible – and avoiding late payment penalties.
- Build strong relationships with your suppliers so that they're likely to be more understanding if and when you run into cash flow problems.
- Consider leasing rather than buying business premises, vehicles, equipment, and other assets. Leasing places less of a strain on your cash flow but can be more expensive than buying in the long term.
Other ways to improve cash flow
- Make your inventory ordering process more efficient. Think about introducing just-in-time ordering and withdrawing products that don't sell quickly.
- Sell assets that are no longer used regularly. If necessary, lease or hire vehicles or other assets when needed.
- Maintain assets regularly and repair them when necessary. This should mean they have a long life and don't need to be replaced frequently.
- Consider purchasing good quality, used equipment rather than new items.
- Grow your sales by increasing your marketing efforts, introducing a loyalty program, or expanding your product range.
Save and invest excess cash
Whenever you have excess cash in your business account, transfer it to either a business savings or business investment account.
On the road to growth in profits, cash flow is king. Healthy cash flow will enable you to rent your business premises, pay staff salaries, and meet all your commitments.
Surplus cash will help your business thrive long-term and provide a safety net for the months when your cash outflow exceeds your inflow.
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