The Power of Cash

“All truth lies in the bank balance” and “Cash is king” are two common phrases every business owner knows by heart. Businesses, both for-profit, and non-profits of all sizes are subject to the power of cash. Cash flow, basically, means the process of liquid assets coming in (receivables) compared to them going out (payables – which include supplier invoices, rent, taxes, salaries, etc.) Many smaller business can find themselves in trouble, regardless of their profitability, or how well they are managed generally if they owe too much to their bank or other lenders.

Managing cash flow is important.

Two common terms are positive cash flow and negative cash flow. The first means that more cash is coming in than being paid out, and the second is the reverse, so overdrafts and other loans need to be utilized. There are a number of simple and effective ways to manage cash flow and to avoid a cash flow crisis.

Basic Cash Flow Management

Plan a year, or at least six months, ahead to keep track of how much money should come in and how much will go out. Compare the two, to see if the extra focus is needed to reduce outgoings or increase incomings at any point in the forecast period. Some outgoings are fixed and some are variable. Incoming cash is usually more variable since it depends on sales, contractual agreements, and the ability of debtors to pay when the money is due.

10 Ways to Manage Cash Flow

There are many ways an organization can manage its cash flow. These are some simple and time-tested methods. Some are obvious, they just need to be managed, and some are less common, but still improve cash flow management.

  1. Send out invoices on time based on pre-agreed delivery/invoice/payment terms. If customers and clients know what is expected, they are more likely to do things on time or, at least, forewarn of missing a payment.
  2. Make sure the quantity and quality of what you deliver are correct, so the customer does not have an excuse for not paying.
  3. Stay on top of the payment schedule. If a payment is late, contact the person so they know missing pay dates is unacceptable.
  4. Sell stock. If some are slow-moving, find ways to encourage customers to buy it. Offer discounts if necessary to liquidate “dead stock.”
  5. Control stock, so raw materials and factored goods are bought when needed, not because “that is how we always do it.”
  6. If good orders come in, and new stock has to be bought, negotiate discounts with suppliers, so the outgoing cash will be reduced.
  7. If you see a negative cash flow situation appearing, offer discounts to customers for early payment. Getting in some cash more quickly may be worth the slight drop in profit – especially if you have also negotiated a discount with your suppliers.
  8. Lease plant and equipment instead of buying it. This reduces large and immediate outgoings and helps to plan future cash needs.
  9. Factor some or all of your invoices. Receiving immediate, if discounted, payment may be better than relying on overdrafts to fund the day-to-day operation.
  10. Raising prices on popular or unique products and services is a good way to maximize positive cash flow.

The Takeaway

Maintaining positive cash flow is critical. Planning and managing cash flow is the sign of a well-run business. To discuss these ideas in more detail, please click here to contact us.