A business can’t operate without cash, yet many businesses have problems with their cash flow. In some senses, this problem is unavoidable. There are, however, steps any business owner should take to avoid short falls in cash flow where possible.
In the most basic terms, cash won’t flow if your expenses and your income ever mismatch. The first two steps to increase your flow of cash will have immediate effect:
Cash swiftly disappears when you have your own expenses to maintain. Flow can be boosted easily if you manage your expenses to provide yourself with the maximum amount of space to pay.
Expenses can usually be deferred, leaving money in your account for longer. If an invoice has 30 days to pay, pay it in 30 days. Use electronic funds to enable last-minute payment. Of course, if early payment gets you a discount, take advantage of it. These strategies keep money in your accounts for the longest time possible, providing a better cash base and gaining you maximum interest.
Much of the difficulty companies experience with cash flow problems is centred on the turnover of stock or payment of invoices. Having a number of strategies on hand to improve your turnover is a good way to ensure constant flow of cash.
Strategies vary between services industries and product-based industries, but some include
- Building in a discount system. As utility companies have shown, offering discounts for early payment encourages customers to pay on time. The expense can be offset by a slight increase in your fees, effectively making the later payment a penalty.
- Ask for deposits, particularly for non-cash customers.
- Use old stock as sale incentive. Old stock is costly when it takes up room. Selling it at a drastic discount gets it out of your premises and can encourage other sales.
- Issue invoices promptly and track. A tracking system for invoices helps you identify late payments as soon as possible.
Three further steps you can take will ensure the security of your flow in future. They are:
Conduct Regular Projections
Financial trouble often comes from unexpected costs. Regularly adjusting your financial projections can help prevent this.
Foster Relationships in Your Finance Chain
Having a relationship with creditors makes it easier to negotiate late payment. While being able to ask for purchase orders from customers gives you leverage when negotiating terms for financing options at the bank.
Build a Safety Net
Finally, build a cushion of cash that will maintain you in emergencies. While this removes cash from your investments, it repays itself in terms of avoiding transfer fees.