Managing Your Cash Flow

When it comes to any business, cash flow is the most important determinant of whether your business will be and continue to be successful.

Cash flow is like your business life force - if the cash flow stops, your business is in trouble.

Managing cash flow is a very important skill for any entrepreneur. The problem is the lag between the time you have to pay the suppliers and employees and the time you collect money from the customers. Hence, the solution would be to delay the outlays of cash (cash going out) as long as possible and encourage your customers to pay as quickly as possible.

Of course, this is not as simple as it seems.

It is important that you prepare cash flow projections as early and as accurate as possible so that you are alerted when trouble comes and you can take some action to correct the situation - this would be to get some extra source of funding till the cash flow improves.

It takes certain skills and experience to analyze cash flow and to detect cash flow problems early.

Monitor closely your customers' payment history. Take early action when you see signs of customers having trouble paying for products or services rendered. Have clear documentation with your suppliers on when payment should be made. Keep tabs on "hidden" expenses like capital improvements, loan interest so they will not "surprise" you. Be aware of the seasonal fluctuations in your business so that you are prepared when sales goes down. Preparing a Cash Flow Projection In the beginning of the financial year, it is a good idea to start your cash flow projection by checking the amount of cash you have at hand.

After that, start to check on all the receivables. This would include payment which is due from the customer, fees for services rendered, earnings from interest, partial collections of bad debts and other sources of money that is due to you. You should continue to closely monitor the receivables and take effort to ensure that these payments are made.

Secondly, record all the amounts and dates of upcoming cash outlay. You will need to check how much and when these money will go out. This would include items like rent, inventory (if purchased with cash), salaries and wages, taxes due, equipment purchased with cash, professional fees due, office supplies, debt payments and so on.

Although this is slow and tedious process depending on the size of your operations, it is probably one of the most important things that you must do.

Tips on Improving Receivables If you have a business where the payment is made the instant the sales is made, you would probably never have cash problem. For most businesses, this is not the case. Here are some tips to help you with improving account receivables:-

Provide incentives to the customer for paying bills quickly such as discounts, prizes. Request from the customer some deposit before the product or services is delivered. Request for credit checks on new non-cash customers. Clear the outdated inventory whenever there is opportunity. Process and issue invoices promptly and follow up with the customer closely. Pay extra attention to customers who has a record for paying late. For slow paying customer, you can insist on Cash On Delivery option. Tips on Improving Payables The rule of thumb is to delay payable as much as you can without creating displeasure to your suppliers or your employees. It would be a good idea to state the expectations early by having a clearly written agreement.

When your business is expanding, there is a tendency to be less vigilant about expenses because things are going so well. Always remind yourself to keep track of payables and always check whether the increased sales generated is able to support the payables.

These are some tips to help you manage payables:-

Take advantage of creditor payment terms. If payment is due in 30 days, do not pay on the 15th day unless absolutely necessary. In fact, negotiate for better terms if the both you and the supplier has been doing business for a long time. You can use electronic means to make funds transfer on the last day when the payment is due. You will make the supplier happy for paying on time yet able to retain the funds for as long as possible. If you having problems to meet certain payments, communicate this to your supplier. After all, it is in their favor that your business do well. If you need to delay payment, you will need their trust and understanding. Choose your suppliers carefully. Analyze the discounts for early payments. Take advantage of bulk discounts if any. Do not focus too much on the lowest price when choosing a supplier because a flexible payment terms can improve cash flow more than a bargain price. Tips on How to Survive Cash Flow Crisis You have managed your cash flow aggressively but due to unforeseen circumstances, you face the situation of lack of cash. This does not mean that you are a failure. Cash shortage is a reality faced by any entrepreneurs.

The key to managing cash shortfalls is to be aware of the problem as early as you can and as accurately as possible.

There is a saying that banks will only lend you money when you do not need them. This is true which is why it is always a good idea to have some cash ready when cash flow problem comes. A banker will not approve a loan when your business shows signs of cash shortage because it usually means you are unable to pay them the minimum sum anyway. This is vital.

If, for any reason, the bankers will not help. The next people to turn to would be your suppliers. A supplier has an indirect stake in your success (because if you are successful, they will have more business) so it is in their interest that your business does well. You may negotiate for an extension in terms until you recover from the cash shortage. If you have been a good customer and always pay on time, there should not be any reason they should refuse.

Another option would be to approach financial service companies that will pay you for your receivables immediately. These are the receivables that you may not be able to collect for weeks or months. With this option, the trade-off is that you will receive a lesser amount of money but you will be able to get the payment immediately and you do not have to bother with collecting the money from the customer.

You may also request your customer to accelerate payments. You can explain the situation you are in, if necessary, and offer discount off the amount owed. The problem with this option is that your customer may view this as a sign of trouble in your business and may go somewhere else. Exercise this option with caution.

A more drastic way to raise cash quickly is to sell your assets or refinancing your equipment, machinery, computers etc.

When faced with this emergency situation, you should start to choose the bill you pay carefully. Ensure that your employees are paid else you will lose them. Make payments to crucial suppliers next and for the rest of your expenses make partial payments if possible or skip them altogether until your cash flow improves.

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