Every entrepreneur knows that “cash is king;” it’s what allows you to capture opportunities. To keep your business healthy, you must manage cash flow. In the simplest terms, cash flow management is the process involved in collecting what is owed to you well in advance of the dates you’re required to pay your bills. Here’s how it works:
A cash flow projection is basically an educated guess about next year or even next quarter. Preparing cash flow projections may seem like a waste of precious selling time, but accurately projecting your cash flow will alert you to trouble before it strikes.
Start with the cash you have on hand and add expected collections. Remember that payment histories are not perfect predictors of the future. Having open discussions with your customers about business conditions and seasonal trends is a better way of predicting payment (as well as providing insight into future sales).
The second phase of your cash flow projection is cash outlay; this entails knowing the dates and purposes for each upcoming expenditure. Some cost categories are fixed, such as rent, insurance, and loan payments. Others are flexible; for example, marketing is crucial to capturing and retaining clients, but if necessary, you can always delay a major marketing project temporarily.
You can’t afford to cut back too much on needed supplies, inventory, or outside services. However, you can control when you pay for them.
Whenever expenses are rising faster than revenue, you have places to reduce spending. After accomplishing as much cost containment as possible, concentrate on other measures for improving cash flow. Among these is establishing a mutual understanding of payment terms with your creditors. If a vendor gives you 30 days to pay bills, don’t pay in 10. In addition, making electronic fund transfers allows you to take advantage of paying your bills on exact due dates.
If suppliers offer discounts for early payment, carefully calculate the details. This may be an avenue for reducing costs or it could expensively harm your cash flow. Consider the value of flexible payment terms when selecting vendors, rather than focusing entirely on prices. And maintain relationships with your key suppliers’ key people; you’ll need their understanding and trust should you need to delay payment at some point.
Fortunate is the entrepreneur who is paid immediately upon completion of a service or who sells inventory the same day it’s acquired. That person never has cash flow problems. Everyone else must manage accounts receivable. Most customers don’t object to paying upon delivery; always make this the starting point of your payment policy. If you offer payment terms, conduct credit checks, including banking references.
A sound strategy to enhance cash flow is collecting deposits before starting a project or processing an order. Most crucial of all, issue invoices promptly and have a tracking system to tell you who owes what and for how long. Follow up immediately when payments don’t arrive on time and convert slow paying customers to cash after completion.