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Cash flow is the lifeblood of almost every business. You could be a startup or a growing company, it doesn’t matter; managing your cash flow effectively will ensure that your business can meet its obligations.
It will also allow you to invest in growth and to stay afloat during those challenging times. Many profitable businesses have collapsed because they ran out of cash.
That is why learning how to manage your company’s cash flow is not just good practice but essential to business survival. Take a look at these practical strategies you can use to take control of your finances.
Image by Ronald Carreño from Pixabay
Understand Cash Flow Basics
Before you can even manage your cash flow, you must understand what it is. Cash flow is determined by the net amount of cash that you have moving in and out of your business.
It is different from profit, which is an accounting concept that may not always reflect a business’s actual liquidity. There are three types of cash flow: operating cash flow for day-to-day business activities, investing cash flow for the purchase or sale of assets, and financing cash flow for borrowings and repayments.
Understanding exactly where your money is coming from at all times and where it’s going is one of the first steps to ensuring your business stays financially healthy. If you need help managing your finances you can invest in outsourced CFO services to help you find ways to free up your cash flow.
Forecast Your Cash Flow
This period is usually weekly, monthly, as well as quarterly. Forecasting will help you to anticipate any shortfalls.
You can also plan for tax obligations. Be sure to prepare for seasonal dips and make some strategic decisions, such as hiring or purchasing equipment for your business. The more accurate your forecast is, the better you will be at avoiding surprises, you will be able to navigate growth confidently.
Monitor Cash Flow Regularly
Creating a forecast isn’t enough; you will also need to keep track of your actual cash flow against your projections. Regular monitoring is going to help you identify any discrepancies, and you will be able to adjust plans in real time.
You can use accounting software to generate your cash flow reports. These will show your inflows as well as your outflows. Analyze these very regularly so you can detect patterns.
You will also be able to spot early warning signs and stay proactive when you use this software. Monitoring should always play a part in your weekly financial routine. Your finances should never be just something you review mindlessly at the end of each quarter.
Accelerate Receivables
Getting paid faster will boost your cash flow and also reduce the risk that you will have late payments that turn into bad debts. To accelerate your receivables, you should make sure that you send invoices promptly.
Try to shorten payment terms and offer incentives such as early payment discounts. Be sure to follow up on your overdue accounts regularly.
You should also consider implementing automated invoicing systems so you can streamline the process. You might also want to explore invoice factoring. This is a great way for you to access your cash a lot more quickly without waiting for clients to pay you.
Manage Payables Wisely
Just as you want your clients to pay quickly, you should also aim to pay all your own bills strategically. However, don’t pay invoices earlier than you need to unless discounts are offered.
You should take full advantage of payment terms and try to prioritize critical vendors. If you are facing cash constraints, make sure that you reach out to your suppliers and try to renegotiate better payment schedules. You should even see if they can extend deadlines. Managing your outflows as carefully as your inflows will help you to maintain a much stronger cash position.
Cut Unnecessary Costs
Reducing expenses is one of the fastest ways in which you can improve your business cash flow. You can start by making sure you are conducting a detailed expense review of your business.
Look at all your current subscriptions. Check your software licenses, too. You also need to consider your office supplies as well as all your travel expenses.
You should make sure that you identify non-essential costs and take a look at some much more cost-effective alternatives.
Can any of your tasks be outsourced? Is it possible to switch your suppliers? By trimming just 5–10 percent of all your monthly expenses, you are going to see a meaningful impact on all your cash reserves in the long run.
Build a Cash Reserve
As a healthy business, you should always maintain a buffer of cash at all times. This way, you can deal with all your emergencies and slow periods as well.
You will also be able to handle unexpected costs. Be sure to build a reserve that covers at least one to three months of all your operating expenses at all times. This safety net is going to help you avoid the need to have high-interest loans or even emergency financing.
Make sure you treat your reserve like any other critical asset that you may have. Be sure that you protect it and add to it regularly if you can. This is especially important during those times when you have strong sales.
Optimize Inventory Levels
Inventory can tie up a big amount of your working capital if you are not careful. If you hold too much, then you will definitely be sitting on idle cash. If you hold too little, then you are going to risk losing your sales.
Try to conduct regular inventory audits if you can, so you can identify all your slow-moving items. You will also be able to optimize order frequency.
Adopting just-in-time (JIT) inventory methods or even doing dropshipping for certain products is going to significantly reduce your storage costs and free up a lot of your valuable cash. This will ensure that things flow smoothly for your business at all times and that you see growth.
