You’d be hard-pressed to find a business owner who didn’t believe in the value of excellent cash flow management. The reason? Because they don’t exist. Business owners who don’t recognize the necessity for stellar cash flow management don’t stay business owners for long. Learn why cash flow management is critical and how to become a pro at managing it.
Cash Flow Management: The Key to Your Business’ Vitality
1) Understand Cash Flow Management - Before you can excel in cash flow management, you have to fully understand it. What does cash flow management mean? Why is it important? Cash flow management (by definition) is:
The process of monitoring, analyzing and adjusting your business’ cash flows.
Or, in layman’s terms:
Knowing how much money your business has coming in and how much is going out. Get it? How the cash flows!
To understand cash flow is to know you never need to have more cash going out than you have coming in. To understand is to know ways to get cash and how to control your spending. You plan the amounts of cash you will need so you don’t find yourself in a crisis. Simpler than you’d think, right?
2) Analyze Your Cash Flow - The next step is knowing how to properly analyze cash flow. First, clarify what are cash inflows vs. cash outflows:
CASH INFLOW EXAMPLES: Sales, interest, investors, selling property, legal settlements, loans, mortgages or bonds.
CASH OUTFLOW EXAMPLES: Expenses (salaries, supplies, credit), investments, legal settlements or cash dividends.
A cash flow statement will reveal how much you spend and where you are getting money from. To analyze your cash flow, you have to understand how to properly categorize every financial transaction your company makes, whether it’s sending or receiving payments. Once you are able to see these clear divisions, you will better prepare yourself for establishing a cash flow budget.
3) Creating a Cash Flow Budget - The most difficult part of cash flow management is defining a budget. However, it’s easier than it seems. The best place to begin is evaluating how much money you think will be leaving your company each month. What are your expenses? Who do you owe money to? By identifying how much you must prepare to pay, you are able to better evaluate the needed value of cash inflows. By estimating your cash outflows, you are then able to specify a minimum cash inflow.
4) Know How to Improve - The great thing is that there are many ways you can gain more control over your inflows and your outflows:
- Renegotiate Your Customers’ Net Terms - If you have identified that you need more cash inflow than what you are currently expecting, a great place to start is to look at the current net terms your are operating on with your customers. For example, if you have extended credit to a customer for 60 days, look at renegotiating those terms with your customers to be Net 30. Remember, credit is a privilege and you have complete control over how much a customer gets. Take advantage of this and reconsider terms when you need to get paid faster.
- Better manage your receivables - Sometimes you find yourself in a weird position with your inflows because there was a sum of money you were expecting to receive from your customers that didn’t come in (or come in when expected). If you are going to excel at cash flow management, you have got to make sure your customers are paying you as promised. Learn how to prevent late paying customers so late invoices don’t halt your cash flow.
- Sell your receivables - If your having difficulty managing those receivables, there are other options that could lead to immediate cash in your hands. Receivables factoring is a way to use your receivables to your advantage. You can literally sell your unpaid invoices to factors, who will buy the invoices at a discounted price and then collect the full amount. Although you won’t receive the entire sum, it is means to get yourself cash in those moments you need it most.
- Ask for extended terms from creditors - Not only can you try to get paid faster, but you can also ask those people that you owe money to if they will give you more time to pay. If you have been a loyal customer to your vendors and creditors, you are in a great position to get longer net terms from them. If you have an extended period to pay, it will allow you to have the say of when you send your check in. Having this option gives you much needed control over your cash outflows.
- Order less stock – Order less of what you need to run your business, but more frequently. Instead of making one large buy of stock, make a larger number of small buys. This makes sure you never have anything sitting that you don’t actually need. It also allows you to have smaller payments in which you owe. These smaller payments are easier to tackle month by month then by throwing off your cash flow projections with those few large purchases.
- Put a focus on sales - One of the most obvious ways to improve your cash inflows is to focus on sales. What are ways you can increase them? Can you sell more to existing customers? Get old customers back? Sometimes it is easy to become complacent in sales, but always be looking at ways to increase them. After all, it is the most obvious way to skyrocket those cash inflows.
5) Fill in the Holes - Through excellent budgeting and forecasting of your cash flow, if you can see that you are not going to have more money coming in than you know will be going out, prepare yourself. Find ways to get your hands on cash. As mentioned above, you could look at selling your receivables, but if your receivables aren’t enough you should definitely consider financing. Borrowing money is a last resort, but should be considered to keep your cash flow healthy.
6) Be Smart with Surplus - When you start improving your cash flow management, you can find yourself in a position of having a cash surplus. This is certainly a positive, but be wise in how you use this. Be sure to save or invest this surplus, allowing you to have investment income, which will be a nice cash inflow cushion to have as you continue to budget and forecast for the future.
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