For business owners, access to cash is critical. Whether it’s for operational expenses, business expansion, or otherwise, you never want to be short on cash when you need it. This is why managing cash flow can be so important to your business, regardless of its size.
Preparation is Critical for Managing Cash Flow
There’s so much required for today’s business owner. But the most important thing when it comes to cash flow is to be prepared. This means setting projections, developing a reliable invoicing system, and understanding the payment history of vendors and partners. While forecasting your income may require some analysis, if you do so conservatively (e.g., using year-over-year sales data), you’re probably well within range. Of course, it’s just as important to forecast your expenses. Some are fixed costs (e.g., rent, insurance, payroll). But then there are additional expenses and even unexpected ones. So it’s beneficial to slightly overestimate these costs. Should you not need them, you’re actually in a better position.
According to a U.S. Bank study, a whopping 82% of businesses that failed cited cash flow problems as a factor in their failure.
Keep on top of your receivables
As a business executive, you’re always concerned with getting your invoices paid. Some companies are reliable and always pay their bills on time. Others require phone calls, emails or even more drastic measures. This is time-consuming, costly and a waste of resources. So take measures to take the anxiety out of getting the money your business is owed.
According to Entrepreneur, here are some ideas you might want to consider to ensure timely payment:
- Require credit checks on all new noncash customers.
- Track accounts receivable to identify and avoid slow-paying customers.
- Offer rewards to customers who pay their bills rapidly.
- Ask customers to make deposit payments at the time orders are taken.
60% of invoices globally are paid late with the U.S. paying, on average, seven days late.
Manage accounts payable
You want to have the right amount of working capital on hand for your business. Thanks to technology solutions, you can keep your cash for as long as possible before paying your bills. As Entrepreneur notes:
- Take full advantage of creditor payment terms.
- Use electronic funds transfer to make payments on the last day they are due.
- If necessary, communicate with your suppliers about your financial situation.
- Carefully consider vendors’ offers of discounts for earlier payments. These can amount to expensive loans to your suppliers, or they may provide you with a change to reduce overall costs.
- Don’t always focus on the lowest price when choosing suppliers. More flexible payment terms can improve your cash flow more than a supplier with the lowest prices.
By paying your creditors before you have to, you’re losing out what you can do with that money, whether it’s investing in your operation, earning interest or otherwise.
Cash when you need it
Sometimes your business just requires extra cash. Whether it’s because of a desire to expand or an unexpected income shortfall, these are the realities of business. The key is to have a plan in place for when this happens. Consider the following two options:
1. Early Payment
There are firms that will pay you cash now for your outstanding invoices. No longer will you have to wait 30, 60, or 90 days for money that’s already owed to you. You can get that money in just a matter of days. And it only requires a small fee.
2. Bank Loans or Lines of Credit
Depending on your business and your overall credit rating, you may qualify for a short-term business loan or even a revolving credit line. While not all businesses qualify, for those that do, it can make a sizable difference.
There are other options as well, but those can be more complex and can take a while to get in place, like selling equipment and then leasing it back, or negotiating with your creditors for things like partial payments.
20 percent of SMEs believe the most recent interest rate hike will hinder their ability to access capital.