Cash Flow is the life-blood of your business
Positive cash flow doesn’t just happen. And especially these days, you’ve got to take action in all areas of your business to ensure that more cash flows in than has to go out.
Here are a few of the actions your can take, right now, to better manage the cash flows in your business:
Prepare and Use a Cash Flow Budget
A cash flow budget is a projection of your business’s cash inflows and outflows over a certain period of time. A typical cash flow budget predicts the anticipated cash receipts and disbursements of a business on a month-to-month basis. However, a cash flow budget could predict the cash inflows and outflows on a weekly or daily basis. Because of the uncertainty involved in the cash flow budget, trying to project too far into the future may prove to be less than worthwhile. At the same time, a cash flow budget that doesn’t look far enough into the future will not predict future events early enough for you to take corrective action in your cash flow.
A six-month cash flow budget minimizes the amount of uncertainty involved in the budget. It also predicts future events early enough for you to take corrective action. However, if you’re applying for a loan, you may need to create a cash flow budget that extends for several years into the future, as part of the application process.
Analyzing Your Cash Flow
To properly manage your business’s cash flow, you must first understand and regularly analyze the components that affect the timing of your cash inflows and cash outflows. A good analysis of these components will point out problem areas that lead to gaps between cash-in flows and cash-out flows for your business. Narrowing, or even closing, these cash flow gaps is the key to cash flow management.
Some of the more important components to understand, measure and analyze are:
Accounts Receivable and Invoicing
Accounts Payable and Expense Managements
Credit Terms from Suppliers and Lenders
Your Credit Policies with customers
Inventory and Capital Expenditures
Establish an Accounts Receivable Collection System
Having an accounts receivable collection system that is documented, followed and reviewed regularly will increase your cash inflows and help to maintain its consistency. Here are a few practical suggestions to setting your collection system:
Clearly communicate verbally and in writing your payment and credit terms in the sale process
Reduce credit terms & internally review payment policies regularly
Choose the team member responsible for collections and set goals
Have a simple and clear “Aged Receivables” report
Set your collection call and follow up rules
Review results, at least, monthly
External Financing Sources
Having access to debt or equity capital will give you peace of mind and allow you to take advantage of business opportunities as they arise. There are a number of sources from the government funded Small Business Administration, and commercial banks to private equity investors. One thing to remember: look for lenders and investors before you need them. In other words, look when your business is performing well.
The problem in locating “smart” money is that the capital market for small businesses is imperfect and consists of a variety of financing sources. Whether you are trying to locate a bank that is willing to lend money to your small business or whether you are looking for a business “angel” who will contribute needed equity capital, your quest for financing will require that you devote the same attention to obtaining capital as you give to decisions involving the business’s basic product or service.
Paying Down your Debt
Paying down any debt you may have is generally the first option considered when deciding what to do with a cash surplus. Even with this business decision, there are many variables to consider. It doesn’t make any sense to invest a cash surplus at one percent when you can pay down a bank loan that is charging interest at 12 percent, or more. However, the decision to automatically pay down debt may not be correct in all cases. The key to making the right decisions in this area, is having an accurate, current and reliable cash flow forecast.
For a complimentary assessment to make sure that you’re doing everything you can to improve your cash position:
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