Management of cash flow
Cash flow is very crucial to the survival of any business. An increase in the profits of a business is a good sign of growth but the focus should also be placed on how to manage your cash. Negative cash flow can harm the business even if the business is profitable.
You may be making a profit but there might be delays in receipts of cash from sales, and if your payments to creditors are due before you receive cash from customers, it affects the creditworthiness of the business as you may not be able to settle your debt obligations on time.
It is also important to understand that the effective management of business expenditure is also crucial to the effective management of your business cash flow. If your expenditure is high, you might be getting a negative cash flow at the end, which is not good for the business.
Here are some other ways to effectively manage your business cash flow.
1. Reduce credit sales: The sale of products or services is a major source of cash or income to every business. Most businesses make sales on credit and if payments are delayed, it affects the cash flow. Therefore, all necessary efforts should be made to either reduce selling on a credit basis or ensure that all receivables are received on time.
2. Discount on sales: The business can decide to offer a special discount to loyal customers or customers buying in bulk, or customers who pay on time. This initiative can encourage customers to pay on time and also encourage them to come back and buy more. More sales mean more cash.
3. Penalty: A penalty should be charged on the accounts of customers who don’t pay on time. This can serve as a disincentive to customers who delay payments. This should be clearly explained to customers before carrying out sales. The business must have their invoice due date and they must stick to it if they want it to work. This will serve as a push for customers to pay on time.
4. Lease, don’t buy: It will be beneficial for a business to lease non-current assets rather than buying it outright if they do not have the cash. Though the business will lose the opportunity to treat it as a non-current asset, you gain lower monthly payments which help improve cash flow. Also, operating lease payments are a business expense, and hence can be written off.
5. Increase price: If your cash flow is suffering, it may be time to consider increasing your prices. But this concept should be done carefully by considering factors such as prices of competitors in order not to overprice your product.
6. Buy stock in bulk: The business should consider buying stock in bulk to enjoy certain discounts that may be associated with bulk buying. The lesser you owe your creditors, the better for your cash flow. It is also necessary to make sure that you buy stock that easily sells to prevent capital lock-up or tying up cash.
7. Creditors Payable time: Try as much as you can to arrange for a favorable payable time with your creditors. The rule of thumb is that, as much as possible stretch your payable period and shorten your receivables period. You may be privileged to pay less if the payment period is not short and this is good for your cash flow. If your payable period is long, you can spread the payments by making small payments. This will help in strengthening your cash position. But you can decide to offer creditors early payments if they are willing to give you a discount in return.
8. Open a high-interest Savings Accounts: A business savings accounts can easily allow you to earn interest on cash not in use . It provides you with some extra cash while growing your cash position.
9. Purchase of Efficient Assets: The purchase or lease of better equipment is a way of increasing business productivity. An increase in productivity enables the business to meet orders and this will increase cash inflow. Also, producing in large quantities enables the business to enjoy economies of scale which is good for the cash position of the business.
10. Short-term loan: One of the ways to cushion your cash position is to take out a short-term loan. With this, the lender gives you a lump sum and allows you to pay back in installment over a short period.