Cash Flow Management - An Essential Part Of Your Business Success

Nat Jackson
August 16, 2012 — 1,433 views  
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Cash flow management is the procedure of checking, evaluating and fine-tuning your company's cash flow. Managing your cash flow is essential for a business's continued existence and development. To manage your business successfully it is necessary to tally the timing and total of your outflow with those of your inflow.

The time difference between when you have to settle with your suppliers and pay your employees and when you receive payment from your clients is the difficulty. The answer is cash flow management.

In very simple terms, managing your cashflow means persuading those who owe money to pay up as quickly as possible whilst delaying your outlay of cash so long as feasible. An essential basic requirement is to prepare cash flow projections for the upcoming quarter and the next year. A precise and accurate projection will warn you well in advance if trouble is likely to strike.

No-one has a crystal ball, but, taking into account such things as your clients' payment histories and your meticulousness in ascertaining future expenditure, your projections should be reasonably precise. Ensure that you can justify your assumptions.

For instance, are you sure your receivables will continue at the same rate; have you allowed for seasonal sales variation; are you going to be able to extend your payables as in the past; and be sure you have included expenses like loan interest and capital improvements.

Inflow Management - If, the instant you made a sale, you were paid, cashflow problems would not arise. However, by good management of your receivables, cash flow will improve. The principle here is to increase the rapidity with which you can convert supplies into products, stock into sales and sales into funds. Consider the following techniques to achieve this goal:

  • Reward clients who pay their invoices promptly with a small discount.
  • Request a deposit when orders are taken.
  • Ensure credit checks are requested on all new credit customers
  • Reduce the price of old, out-of-date stock (even drastically) to dispose of it.
  • Track down customers who pay too slowly. If you don't want to refuse their business entirely, think about insisting on cash on delivery.

Outflow Management - It is essential to watch expenses very carefully when managing a company. When sales are going well and increasing it is easy to be lulled into a false sense of security. If expenses begin to grow faster than sales, act swiftly to control them. Consider these money management tips:

  • Don't pay your bills before it is necessary. If the terms are 30 days, don't pay before that period.
  • Suppliers' discount offers should be carefully scrutinised. Only take them up if they give you the chance to reduce your overall costs. Read the small print.
  • The lowest price is not always the best option when selecting a supplier. A slightly higher price, but with more flexible payment conditions that could improve your cash flow, might be the better option.

Sustaining working capital is a challenge for all business, but with good cash flow management it can be done.

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Nat Jackson