Cash flow is a process of movement of cash in and out of your business. The total cash of a business is in two forms i.e. cash in hand and cash at bank in the form of checking account. Successful cash flow management makes it possible for a business to meet its operating cost, pay its liabilities on time, save some cash in the form of reserves and put down sufficient cash again as investment capital in a business.
Since cash is king, its effective financial management is a key to successful operation of a business. Often in a business, you need to pay your wholesale suppliers before you get paid by your customers. This delay creates difficulties for businesses to meet their obligations on time for which careful cash flow management is an ultimate solution.
You can have an idea about the importance of cash flow management from the fact that if you lose a customer, you just lose your a sale which can be regained by pleasing another customer but if you don’t pay to your employees, suppliers and creditors, you probably lose your entire business.
Imagine a system where as soon as your business experiences a cash outflow, it also encounters a cash inflow. Well, in the real world however, nothing like it can really happen. Entrepreneurs know well cash inflows and outflows occur at different times, which is the main reason why businesses often face cash flow gaps. With the following six techniques businesses can narrow down these gaps and maintain a healthy, steady and positive cash flow.
Make Cash Flow Projections – Prepare accurate cash flow projections for the next 3-5 years, highlighting troubled areas requiring careful planning and management. These projections give educated guesses of all important areas of cash conversion cycle and reveal where the business is headed. Making cash flow projections is a challenging task so businesses must have accurate and complete data on cash balance. For this purpose, they can even hire the services of some professional accountant to make as accurate projections as possible.
Improve your Cash Inflows – Businesses should try to speed up their cash conversion cycle i.e. they should improve the speed of turning raw materials into finished products, finished products into receivables and receivables into cash. For that, businesses can offer discounts to those who pay in cash either on the spot or within a couple of days of making a purchase. Monitor your outstanding payments, remind your customers about the outstanding payment and tell them if they pay on a certain date, they will get a free gift or an extra discount on their next order.
Delay Your Cash Outflows – You probably need money to pay your creditors or suppliers for raw material and other components required for manufacturing. Make sure you take full advantage of the creditors’ payment terms and don’t make payments before the due date. Carefully analyze the impact of early payment discounts on your cash flow before you make an early payment. Choose a supplier who offers flexible payment terms and understands your problems without charging any penalty in case the payments get delayed.
Spend Within Your Means – Always monitor and control your business expenses to the best of your abilities. If you have fallen in love with some fancy furniture, never buy it unless you carefully analyze the impact of this purchase on your cash flow. Try to reduce expenses on utility bills, office stationary, kitchen stock and even storage cost and keep as much amount as possible in hand to meet any shortfall in cash flow. Careful spending not only allows you to reap high profits but also helps you to maintain funds for the growth of the business.
Overcome Cash Flow Gaps – No matter how well your business is managing its cash flow, there comes a time when you face a lack of cash. This temporary situation can be handled if you take proper measures before. First of all, you can meet this shortfall from the cash reserve maintained by your business to meet unexpected expenses. If this does not provide enough help, you must manage this shortfall by taking formal credit from banks. If you are on good terms with your creditors, you can request for an extension of time for payment.
Invest Cash Surplus Wisely – If you have been good at cash management, you will probably have some extra cash in hand at the end of every month. This is the surplus cash left after meeting your day to day business expenses. In order to keep this amount immobilized and prevent its value from erosion, you must invest it wisely in some prolific and low-risk investment vehicle. This cash surplus brings an additional source of income for your business till you liquefy it to meet your temporary cash shortfalls.
A perfect cash flow management is the key to survive in the today’s competitive marketplace. With the above-mentioned tips, businesses can easily manage a perfect cash flow with enough surplus cash in hand at the end of every month.
About the Author
Julie Robert is a B2B wholesale trade and B2B marketing expert. She writes frequently on the topics related to UK Wholesalers and Wholesale Supplies.
