Cash Flow for Your Business (What You Need to Know)
Strategies and best practices to accelerate business cash flow management
Effective cash flow management is key for running a company successfully. From small startups to well-established enterprises, any business can face a cash shortage or surplus from time to time.
Consider these tips and strategies to keep your funds flowing and your business on a path to growth.
Revisit Your Budget Projections
Maintain a forecast of expected cash inflows and outflows to avoid any potential issues. And, for accuracy, revisit these projections periodically to challenge your assumptions with real-time data.
Here are four variable factors that can throw off your cash flow calculations:
- Timing of payments: Do your projections reflect when payments will actually come in? If your customers are taking longer to pay, consider adjusting your forecast accordingly. To compensate, it may help to push back your own payments to suppliers.
- Revenue deductions: If you sell a product, your actual vs. projected revenue can vary based on the channel through which you sell it. For example, selling through a distributor can result in lower revenue (higher fees) than selling directly to consumers. Keep your cash flow projections on point by taking into account any deductions from third-party sellers.
- Inventory and supply chain costs: No one can predict exactly what customers will order and when. To avoid over-investing in inventory, factor in the occasional extra cost of expediting shipments from suppliers. That way, you’ll be prepared to meet unexpected demand without overstocking on products. You could even consider negotiating with suppliers to have them hold an inventory cushion during key times—such as a predictable busy season.
Be proactive about collecting payments: Slow payments compromise cash flow and can cause businesses to come up short on funds. You might need to establish a more aggressive collection model to ensure on-time delivery of the cash you’re owed.
Best Practices to Accelerate Your Cash Cycle
Business owners should take the time to study their cash management methods periodically. Following these seven best practices can help ensure you have cash on hand for unexpected needs.
- Invoice promptly.
- Ensure invoice accuracy to avoid a payment delay.
- Accept as many forms of payment as possible.
- Require up-front payment for orders or projects with significant up-front costs.
- Offer early-pay discounts.
- Consider automated billing solutions to help you flag late payments or send reminders.
- Address late payments quickly.
Consider Ways to Invest Extra Cash
While it’s always smart to have cash available for unforeseen costs or incoming payment delays, having too much could mean missed opportunities. For example, do any of your suppliers offer substantial discounts for paying early? Or are there short-term investment opportunities to consider?
Keep close track of your cash position, so you’ll have just the right amount of cushion, and then consider ways to invest your extra cash to maximize returns.
While crunching numbers might not be the most exciting part of managing a business, it’s an important priority to reduce your risks and maximize your return on investment.