Having a positive working capital is an essential metric that measures your operational liquidity. This is the ability to pay off short-term liabilities such as debtors. Operational liquidity is usually measured in percentage or the ratio of the current liabilities.
Cash flow management, however, is not easy. Small and medium-sized businesses SMEs usually find it difficult to handle and manage cash flow as they often find themselves in constraints of current liabilities and need financial advice and solutions. Getting financial advice will also promote better tracking of assets, expenses as well as all liabilities making the business much easier to manage. Here are a few tips to go about it.
- Regular Monitoring
Regular cash flow monitoring gives a business a sense of direction. Cash flow projections also enable the business to identify seasons when there will be surplus and when there will be shortfalls in order to foresee and plan operations.
This is by investing in cash reserves and looking for financing options in case of need. These might include invoice factoring, Invoice financing or logbook loans. Projections can range from 12 months to 3 years depending on the needs of the business.
- Be Honest To Yourself
For good cash flow customers who make late payments should be avoided at all cost. It might sound absurd but turning away a client who insists on paying in more than 90 days will be more to your benefit than cost. This is because customers who require a long time to clear off their debts might put you into constraints thus hurting your profit margins as well as your operations.
Use of asset financing options, however, may help if you get clients who do not mind paying to the third party as in the case of invoice factoring. If you do not have any access to working capital solutions, however, caution needs to be taken not to hurt your business
When invoicing your customers, try as much as possible to get money upfront. This can be through credit card payments, taking deposits when receiving payments or availing more payment options. This always boosts your cash flow.
- Use of Charts
Using charts help monitor expenses and assist you to see the bigger picture. Charts also give you statistics on the growth and performance of your business. This can also help in future projections and decisions. Charts also play a big role in making decisions such as cash reservation and financing options when the business run in shortfalls.
- Designate a Monitor
A cash flow monitor might as well be of help to your business. Hiring a trustworthy expert will also give you expert advice on what to adjust and where you might be making a mistake. This is very instrumental especially when handling large amounts of cash in different accounts.
- Focus on Cash Flow Not Profits
When managing cash flow, profits should not be overestimated. This might lead a business to concentrate on what it makes in terms of profit and forget its expenses. All the two needs to be put in cheek. Managing cash flow by keeping the expenses at bay will prove to be more profitable at the end of the day.
- Maintain Cash Reserves
When making profits, maintaining cash reserves supports the business when it runs into shortfalls. This is the time when cash gets scarce. Cash reserves also serve to support the business meet regular and required fixed monthly expenses such as rent, wages, and short-term debt.
- Know the Break Even Point
Knowing your break-even point is very crucial when planning your cash flow. This comes in handy when planning as negative cash flow before you start making profits might make your business fail before achieving its goals.
- Boost Sales with Incentives
Incentives such as lower interest with faster payments help you get your cash back as soon as possible. Although this might not be the best or most profitable decision. Incentives enable customers to pay you faster making the whole business process faster, easier and more profitable in the long run.
- Extend Payables As Long As You Can
Suppliers and short-term creditor should be extended as far as possible. This will give you the chance to have the more liquid cash to cater for expenses as well as other short-term needs. However, caution should be taken in order not to pay late fees as some creditors usually input this.
Managing the three key elements of cash flow accounts reviewable that is what your clients and the customers owe you, accounts payable which are the amount of money you owe your suppliers and shortfalls which cannot be avoided is key. Starting with some amount of money in the bank or cash might help in case your business falls into this. This is almost unavoidable and preparation is always the best approach.
These will not only help you manage your cash flow better but also give you clear insights on where exactly the challenge is and how to manage it if not solve it. Cash flow management also ensures business survival as the business is able to plan and dynamically adjust to the demand for its operations.