Business cash flow is important and having a smooth one can make doing business far more of a pleasure than having the opposite. So, how do businesses ensure the former and not the latter – we take a look.
First, design a budget.
One of the first things that business owners should do is sit down and estimate the expected amount of cash that you think you’ll have coming in and out over the next year. Information to consider should include everything that affects timing of your company’s incoming cash, including the sales cycle itself, any discounts or sales you regularly provide your customers, and general rates of delinquency in the industry.
It’s also important for you to estimate expenses and other times that you regularly need to spend cash. This will include times that you’ll need to buy equipment for your business, as well as raw materials for any products that you make. You’ll also need to include the schedule for the payment of your company’s salaries, taxes, and other regular expenses. SCORE, which is a national support nonprofit group for small business owners, is happy to provide a free template that business owners can use to budget their cash flow.
Carefully Monitor the Results of Your Budget
You can’t just set up a budget at the beginning of the year and then forget about it entirely. It’s a living document that you have to pay regular attention to. On at least a monthly basis, but more frequently if needed, you should take some time to compare your actual cash flow to the budget and figure out any flaws. If your cash in flow is regularly less than you’ve been anticipating, you’ll need to figure out the reason for the shortcoming. If you’re spending a great deal more than you’d originally anticipated, you’ll also need to figure out the reasons for that difference.
Once you’ve determined the reasons for the differences in budget, your business can adjust accordingly, either by adjusting your budget, adjusting your business plan, or both.
Rent Rather than Buy
They say that if it appreciates buy it and if it depreciates then rent it and that’s an important thing to consider in business.
Cash flow can be improved if you don’t have to make large purchases of items that depreciate. So, instead of buying a car, lease one or instead of making a large heating or cooling system purchase, use a rental boiler. Being smart about what you purchase and what you rent can be a big help for cashflow.
Always Have an Alternate Plan
No matter the amount of time and effort a businessperson spends on their budget, anything can crop up, causing problems and destroying even the best cash based budget. During these times, a business may need to rely on a source of savings or a loan in order to keep their operation functional until everything goes back to normal.
Normal sources of this type of funding can include lines of credit, selling personal assets, or relying on friends and family. Business owners should have this secondary funding source lined up well before they need to switch to Plan B.
A business owner who will need to borrow money to cover a cash shortage in their business should have already secured a line of credit long before the money is actually needed. If the business is already experiencing money distress or has already maxed out other credit cards or lines of credit, obtaining loans may become more difficult.
If a bank is agreeable to extending a loan, very few banks can underwrite and approve a loan in just a few weeks. In that short period of time, a business that is experiencing severe financial difficulties may have already failed.
Turn Bills Around Quickly
One key component of managing cash flow is making sure that you keep tight control on the funds that are coming in and out of your business. While it may be normal for some businesses to extend credit to buyers, allowing them thirty days to pay bills, these transactions can be difficult for business owners. When buyers don’t need to pay bills for up to thirty days, this means that the business must struggle to pay its own bills for another thirty days.
The easiest way to solve this issues is to be sure to bill a client immediately, without holding on to the invoicing in a processing stage. Businesses that do use credit sales should deliver their invoices within 24 hours of each individual transaction. These companies may also want to send reminders before invoices are due. Delayed invoice delivery will receive many payments late, due to the processing time required by the buyer, as well as time required by the postal service. Email will also dramatically reduce the time in which invoices are paid.
To reduce the pressure that credit can create, businesses may want to use other ideas to speed up payments. One tactic is to provide discounts to buyers who pay their bill in full within a certain period of time, such as ten days. Buyers who have money to spare may be willing to make payment in order to save that amount of money.
Each business owner has dreams of making a large sale. Unfortunately, making these large sales on credit may often then require the purchase of more inventory. In these instances, businesses may want to consider having the customer provide a down payment to reduce the burden on the company cash flow, so that the item can be purchased without it causing an issue for the business.
Arrange Policies for Timely Payments for All Customers
A sound cash flow policy calls for on time collection of all invoices, with timely payments as well. This means that the business should not pay its bills either early or late. The business should make sure to pay its bills precisely when they become due. This makes sure that the money is working hard for the business for as long as possible.
For as long as the business is cash flush, managers should ask for discounts for using cash at the time of all purchases, instead of making the purchase on credit. Often, the offer may encourage the seller to offer such a discount. This can be extremely beneficial, especially in case of larger ticket items, where a percentage discount can be quite meaningful.