Cash is the fuel that drives business. Typically, the more cash you have in the tank, the longer your business can travel on its journey. The last thing you want to do is run out of gas.
If your business is dealing with cash-flow challenges, it's always a good time to step back and examine what's working and what isn't. And when that time comes, consider these cash-flow tips to help you manage your resources more effectively.
Understand cash-flow analysis.
To fix your cash-flow problems, it's important to look beyond the balances shown on your bank statements. It's a deeper issue that requires a review of your accounts receivable, or AR, to see what's outstanding from your customers. Your AR is the point of influx for your company's cash flow. If you see too many unpaid invoices, that could explain the lack of cash flow.
However, you also need to examine accounts payable, or AP, which is what you owe vendors, suppliers and employees. Even though AP equates to cash leaving your business, it must be considered as part of your cash flow because you can find ways to control when and how these payments are made.
Lastly, examine funding shortfalls for your business. No one wants to be short of cash, but understanding when and why shortfalls occurred can help you improve your cash-flow strategy.
Alter your mindset.
Despite the importance of cash flow, business owners tend to focus on profits and only pay attention to cash flow when a shortfall arises. You might want to change that outlook. Yes, profitability is the goal—and cash flow is the means of achieving that.
Managing cash flow helps a company reach profitability by shifting focus to collecting revenue and timing your expenditures in a way that keeps the books above that break-even point. That may mean putting your energy into achieving consistent cash flow rather than assessing your company's fiscal health by its bottom line.
Address outstanding customers.
If you've set payment terms, it's important to stay on top of those deadlines, rather than letting the customers pay when they like. Regularly review what's outstanding and send reminders to round up this outstanding cash.
It may be difficult to check what's owed continually. Accounting software can speed up this task by delivering a dashboard report.
Upgrade to digital AR and AP processes.
Problems with cash flow often come down to a matter of timing. Both income and expenditures must be coordinated carefully. The frequent distractions that haunt entrepreneurs often create other high-level problems that make them lose track of orchestrating this optimal timing.
That's where digital processes come to the rescue. Eliminating manual invoicing and payment processes reduces the time it takes to send and receive money. Even small reductions in time (a day or two, for example) can make an extraordinary difference to cash flow and may immediately help improve the process.
Look for digital tools that help you automate and save time on recurring invoices, sending payment reminders and coordinating automated payments. Additionally, you may want to explore different payment-acceptance methods that help customers pay more quickly.
Create cash reserves.
You may not have significant amounts of money that you can set aside right now. Yet even small sums put aside each month will build up over time. Once you have built up your cash reserves, they'll be available for you to tap in lean months or when the unexpected happens.
Despite the importance of cash flow, business owners tend to focus on profits and only pay attention to cash flow when a shortfall arises. You might want to change that outlook.
Help stretch your cash flow with business credit cards.
Consider including a business credit card in your business funding plan. The main advantage to utilizing credit cards for business expenses is that you can buy yourself three weeks to a month of extra time before payment comes due on goods and services you need to purchase to keep your business going.
That grace period buys you time to receive more customer payments that you can then use to help pay down your credit card bill.
Extend other payables and shift due dates.
You can also buy some time by asking your vendors to extend their payment terms to 60 or 90 days, if possible. Just make sure that the vendor won't charge your company additional fees in exchange for these extended repayment periods.
Another option to help optimize cash flow is reviewing all the monthly payment due dates to see how you might shift some to other parts of the month, spreading out these obligations and possibly achieving a better balance between income and expenses.
Always look ahead.
Although it's more comfortable to stick to the short-term, the reality is that long-term planning helps you anticipate future needs and improve your cash flow significantly. This means keeping updated and detailed financial records that reflect patterns, which can inform your cash flow strategy.
Beyond the day-to-day, pay attention to external economic, competitive, social, legal and environmental factors that might impact your business needs and performance. Regularly review available technology that might help improve AR and AP processes to optimize future cash flow, as well.
Incorporating these short- and long-term cash flow tips will help you improve the way you fuel your business and the results you see.
Photo: Getty Images
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