The term "cash flow" refers to the money coming into the business minus the money going out to meet bills and other financial obligations. It's the lifeblood of any business and, as such, it's important for business owners to pay close attention to cash flow as part of the overall financial health of the organization. A business might have solid profits on paper, but still run out of money and go under.
Fortunately, there are some steps business owners can take to better manage the cash flow.
1. Measure the Business’s Cash Flow
Peter Drucker, considered by some to be the father of modern business management techniques, said "what gets measured gets improved." Before you can develop policies to help manage and protect your cash flow, it's important to know exactly how much your cash flow is. A qualified accountant can help you prepare an accurate forecast for the current period as well as previous periods, giving a solid understanding of the state of your cash flow
A cash flow statement is a summary of actual and/or anticipated incoming and outgoing cash over a specified period of time. With the help of cash flow statement, you can assess how much and when cash is flowing in and out. Cash flow statements can be used as a basis for budgeting and business planning. You can also use this statement to make accurate future projections of your cash flow. Projections will alert you of troubles before they actually hit.
2. Improve Receivables
Ideally, all clients would pay instantly for purchases made, making it simple and instantaneous to track incoming cash flow. But often, consumers obtain goods and services on credit. "Receivables" refers to outstanding invoices carried by a business. Carrying too many receivables can hurt the business because more revolving credit means less cash with which to operate. However, a decrease in receivables means that more clients are either paying with cash, or settling their statements in full, giving the business more cash to meet its obligations.
Given the effect receivables have on cash flow, business owners should closely manage their receivables. The idea is to increase the rate at which receivables turn into cash. Techniques to do this include:
• Giving discounts to customers who pay promptly
• Conducting credit checks on non-cash clients to reduce the number of high-risk credit holders
• Promptly issuing invoices and conducting follow ups
• Tracking business receivables to identify and avoid slow-paying clients
3. Manage Business Payables
"Payables" refers to money the business owes to creditors, lenders, employees or the government (taxes) Payables are a liability to the business. Decreasing your payables means you use your cash to pay off some of the liability, reducing your total cash. Hold off paying these until they are due, ito protect your available cash, while honoring the terms between you and your creditor and protecting your credit rating.
If you need to amend these terms, or ask for an extension, communicate promptly and clearly with your creditors, By doing so you retain their trust. Whenever possible, take advantage of discounts given for early payments.
4. Surviving Shortfalls
Every once in a while your business might hit a rough patch, making it difficult to pay your creditors, or meet other obligations. But that doesn't mean you should close shop — a downturn isn't necessarily forever and proper cash management during this period can help see your business through to better days. The key to managing a shortfall is being aware of the problem as early as possible and taking the right precautions.
The cash flow statement projections can act as an indicator for trouble to come, giving you a chance to arrange for a line of credit with your bank. The loan will go a long way in helping you meet your obligations. But if it gets tough, for a fee, there are companies who will buy (or factor) your receivables. If it's looking bleak, don't wait too long to take action.
Cash flow is fluid and should be reviewed regularly. These reviews will help you see which strategies are working, and make it easier to make further adjustments to your systems and processes to help manage your business.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.