The best way to navigate a river is to paddle your canoe with the current. This will ensure that you go far without wearing yourself out. Similarly, your business will only remain healthier if you can manage your cash flows towards the profit line. Here are 4 ways that you can apply to properly manage your cash flow:
Project your Cash Flow
A cash flow projection for the coming months or year serves as a warning system for your cash flow hiccups. Use spreadsheet or any other suitable accounting software to plug in your expected monthly or annual cash inflows and outflow as well as your anticipated big purchases. Your projection should also include anticipated slow periods to allow you plan in advance on what you will do during such times. A cash flow projection will help you determine how you can save when things are flowing and how to appropriately distribute the cash when your revenue is tight.
Don’t also forget about taxes. Ensure that you set aside some amount every month so that you are not caught unaware by a major tax bill at the end of a financial year.
Accelerate your cash conversion circle
Your cash conversion cycle is the duration you are disbursing and collecting cash. In manufacturing businesses where inventories are involved, 3 months or more is common. Ask for down payments, get your customers pay on a monthly basis, or put them on retainers. You can also lower your inventory levels by encouraging your suppliers to do deliveries the same day or the next day or by negotiating for longer payment periods and terms.
Another great way to accelerate your cash conversion cycle is to offer deals to customers who make purchases for a fixed period of time. For instance, you can make some products and services subscription-based such that clients pay upfront for a given period of time, and in return they get better deals on the products. This will ensure that you have continuity of sales and a shorter cash conversion cycle.
Insist on Timely payments
“One of the most crucial ways of ensuring that you have a consistent cash flow is receiving your payments on time,” said Fulton CPAs. It is simple: you cannot foot your bills if nobody is paying you. Accordingly:
- Ensure that you customers understand your payment polices. What are you late payment fees? And what are your payment deadlines?
- Strive to invoice your customers as soon as possible. Sending your invoices ASAP will enhance faster payments. Sending you invoices on or close to the due date increases your likelihood of being paid late.
- Simplify the payment processes: Offer several payment options on top of a paper check, such as ACH, credit card, or online. You can also make it easy for clients to pay by giving them clear address and links to send the payments.
Have in Place an Emergency Fund
It’s always better to be safe than sorry. Spare some money just in case something unexpected happens or knocks your business off the balance. Keeping aside 3-6 months’ worth of your business expenses will cushion your business if it hits hard times, especially if it is a small startup. Even if you can’t save this much, determine how much you are willing to save every month and put it in a banking checking account of your choice so that it can earn you some interest. It may appear to be a small interest, but it can save you a great deal in case of emergencies.
If you have a business with uneven cash flow such as a retail store that makes the most of their sales in August, and completely dry in January, you need to save and stash some money to keep your business afloat during the dry seasons.
When it comes to managing your cash flows effectively, there is no shortcut or an overnight solution. As its name suggest, cash flow management boils down to understanding how your business works, having access to enough working capital, and adopting your saving plan. Remember, there is nothing as stressful and embarrassing as running out of cash, especially if you are a businessman or woman. It is not good for your well-being either.