Cash flow management is the biggest issue faced by small and medium-sized businesses. On the one side the aim is to grow as a company and to do so you need more earnings. While on the other side you need to make enough to meet your existing expenses.
Your targets and budgets are in place to help you achieve your goals. And so, you need to monitor your financial performance frequently. Some of the key factors that influence your cash flow are revenue, profitability or gross margins and expenses. Any change in these factors will change your cash flow projection.
Here are 7 tips that will help you manage your cash flow:
TIP# 1 SPEED UP YOUR CASH INFLOWS
Collecting cash is the difficult part of any business. If your competitors offer a credit term this works against you in the market. It is important for you to understand why your clients pick you. If you have established a niche in the market it gives you an upper hand with payment terms.
So, what do you do when you don’t have the upper hand?
There are other ways that can be tried and tested with your clients to find what works best for your business. Here are various ways to speed up your cash inflow:
a) Payment Reminders
The first and obvious option is to set payment reminders. If an invoice is due on a certain date it is good practice to send a payment reminder to your client at least 7 days before the payment is due. Always keep in mind that your clients are also monitoring their cash flow and taking necessary steps to delay payouts. Staying on top of this will let them know that they will need to clear it sooner than they would like.
b) Late Payment Fees
Start including late payment fees in your quotations. Clients should be made aware that delays have consequences. When sending out a quote your client should not only agree to the cost but also your terms and conditions. Request them to sign your quotation, mark it as approved and add their company stamp on it.
c) Quick Payment Discounts
Everyone is looking for an opportunity to pay less. You can capitalize on this idea by offering a discount to your client if they pay upfront. Be sure to check your gross margins before you do so. As a rule of thumb, keep the discounted rate at your minimum gross margin. Delayed payments take time to collect and it’s not wrong to charge extra for the time invested in this.
d) Online Payment Options
Technology is taking over. With cloud-based accounting software, you can attach a payment link to your invoice. This link allows your clients to pay online via credit card. This adds on the benefit of a quick payment option for your client that could speed up payments.
TIP# 2 DELAY YOUR CASH OUTFLOWS
Delaying payments doesn’t necessarily mean you shouldn’t pay your suppliers on time. While on one side you can encourage your clients to pay upfront, on the other side you could come to an agreement with your suppliers to give you a credit term. Eventually, you follow a cash flow cycle with quick inflows and slow outflows.
The longer you can hold on to the money you have the better. Be careful when doing so as you wouldn’t want to affect your relationship with your suppliers.
The main benefit of delaying cash outflows is to plan for these payouts. You can add them to your cash flow projections and improve your cash position before clearing any dues.
TIP# 3 STAY ON TOP OF YOUR BIG EXPENSES
It is easy to forget about the big one-time expenses that come up. This could be your license renewal, tax payments, annual subscriptions and insurance.
Your cash flow projection will cover these amounts however, you need to know this in the back of your head. Payments like these cannot be delayed. If the market is slow which affects your ability to generate revenue, you need to look at where you financially stand and what is required to pay off these expenses.
TIP# 4 COVER YOUR MONTHLY EXPENSES FIRST
When going over your cash flow projection, the first thing to check is if your current month’s expenses are covered. If it isn’t then you need to look into what needs to be done to make up for it. Every other payout on the list can wait.
The biggest expense any company has is wages and salaries. To keep the business going, you need to be in a position to cover this. If your employees are worried about not getting paid, this will have a significant impact on your workflow.
Your monthly expenses give you an idea of what you need to generate every month. In addition to this, you should also pay attention to the type of business you run. If it is a seasonal one, you need to plan ahead to cover your expenses.
TIP# 5 MONITOR YOUR CHEQUES HANDED OUT
Personally, I try to avoid paying by cheques. While it can be a great payment method for delaying payments it needs to be monitored carefully.
Not everyone rushes to the bank immediately after they collect their cheque. This results in a false bank balance that can lead you to think that you have more than you really do. Making decisions off of this balance can have deadly consequences if you’re working with sensitive cash flow.
If your cheques are not tracked against your bank statement and you exceed your expenses, this could result in cash outflow that wasn’t planned for. Even worse, if you’re working with very little, to begin with, it could lead to cheques bouncing which will cause your bank to take action against you.
TIP# 6 AIM FOR 3 MONTHS COVERAGE
By 3 months coverage, I am talking about holding on to enough cash reserve that will cover 3 months of your company’s expenses. This should be on your list of goals for your business.
A good cash reserve will help your business during the low season. The knowledge of knowing your business expenses are covered for 3 months will reduce your stress level and give you more time to focus on new revenue that will add to your cash reserve. This opens a new door to calculated investments.
When you are in this position, you can start taking on a little more risk. You can invest in additional resources that can add to generating more revenue and further grow your cash reserve.
TIP# 7 COMPARE YOUR TARGET ACHIEVEMENT TO YOUR CASH FLOW PROJECTION
Your company may not always meet its targets. As a result, this affects your cash flow. Pay attention to how much of your targets are met. Start looking at realistic numbers your company can achieve in the upcoming months.
When you get an idea of what these numbers look like, run it through with your cash flow projection to crosscheck if it covers your expenses and where your cash flow is heading.
By doing so, you add reality to your cash flow and get an overview of the impact the market has on your business. This will not only give you insight into the functions of your business and the market but will act as a tool for making decisions before facing a financial storm. Staying ahead of your weaknesses gives you the upper hand.
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