Proper cash flow management is vital for long-term financial success. A healthy and sustainable cash flow in and out of your business means you can pay employees, suppliers, rent, taxes, and other operating costs on time. When companies fail for financial reasons, poor cash flow management is usually the primary cause. Managing cash flow can be one of the biggest challenges business owners have to face. In this article, we will go through what cash flow is and how to successfully manage it.
What is cash flow?Cash flow is defined as the funds moving in and out of your business. Typically, businesses track cash flow either weekly, monthly or quarterly. Positive cash flow occurs when the cash entering your business from sales or accounts receivable is greater than the cash leaving the company to pay suppliers, monthly expenses, or salaries. Negative cash flow happens when cash outflow is greater than your incoming cash, indicating that you are spending more money than you are earning; this leads to your business not having sufficient funds on hand to pay for day-to-day business operations.
Why is managing cash flow important?It is essential for businesses to practice proper cash flow management to know if there are sufficient funds to cover regular expenses, invest in new opportunities, or grow your business. It is also an important factor that may affect your business reputation and credit rating.
Navigating in times of uncertaintyWhen uncertainty hits, such as the COVID-19 outbreak, inflation or other economic headwinds, larger businesses often hold sufficient cash reserves to ride out the bad times. Smaller companies on the other hand, are less likely to have enough financial resources on hand to weather the storm. That is why you should always keep an extra-close eye on your cash flow.
Better understanding of your spendingPaying close attention to your cash flow management helps you to better understand your spending, and to be proactive rather than reactive with your business finances. It also enables better business planning.
Drive business growthEffective cash flow management enables businesses to reinvest in assets such as technology to spur growth. Although putting in place the right processes to achieve a healthy cash flow takes time, companies that plan ahead with this in mind will be in a much better position to reduce financing costs and make smart decisions on reinvesting surplus cash into the business. In a competitive business climate, it can be the difference between a company’s success and failure. Below are some of the cash flow management strategies to consider:
Ways to improve cash flow
Lease instead of purchasePurchasing equipment is cheaper in the long run but is costly in the short run. You may consider leasing equipment to lessen the short-term financial burden and to have more cash on hand for other business operations. Leasing equipment can also help lower your tax burden, as leasing is qualified as an allowable business expense.
Negotiate your payments with suppliersNegotiate for a longer payment term with regular suppliers. While using suppliers with the lowest price may seem like the best way to improve cash flow, flexible payment options can be more attractive than bottom-shelf pricing. Try to time your payments with your cash inflows to maintain a positive cash flow.
Issue invoices promptlyIssue invoices every time you complete a certain amount of work. For longer projects or long-term contracts, set a few payment milestones with your client or customer so that you will get paid in stages of progress throughout a project when the agreed work is completed. To collect receivables faster, you may:
- Request up-front deposits or partial down-payments from your customers when an order or assignment is placed. For larger orders, you can negotiate for stage payments throughout the duration of the project, based on completion milestones.
- Offer discounts to customers who pay before the due date.
- Provide a range of payment options.