How To Manage Your Business Cash Flow

Cash is often called King when it comes to financial management of any organization. You need to manage your cash flow effectively if you want your business to grow and survive. 60% of businesses remain profitable, but run out of cash to pay suppliers, purchase raw materials or even pay salaries. By implementing tried and tested strategies, such as factoring invoices at the right time, you can prevent this from happening to your business. 

These are a few ways for you to effectively manage your business cash flow to ensure constant growth.

Be Ready for Anything 

There are several things you can identify and prepare for in advance. Start by identifying the common risks in your industry. For instance, do suppliers want immediate payments and do clients usually have a 60 day or a 90 day accounts receivable cycle? If your answer to both these questions is in the affirmative, you need to focus on immediate working capital because all your money is going to be tied up in accounts receivable.

Next, you need to shift your focus on personal business risks, such as are you equipped to handle a big order if it comes suddenly? Or, what if a big order you were counting on gets canceled at the last minute? This risk analysis is the basis for your cash-flow budgeting process. There are several remedies for most risks, such as short term financing and factoring invoices. The trick is to understand which strategy to use when. 

Don’t forget to account for non-paying clients when assessing your risks. 

Generate Invoices Quickly 

Always follow the business success mantra of billing early and collecting quickly. This can help you guard against any late payments and to ensure that all your invoices get paid on time. Don’t wait until the end of the month to draw up all invoices together. Instead, generate them as soon as the services or goods are delivered. You should ensure that your invoices are made error free, are clear and detailed. This will allow your clients to understand the invoice and pay up immediately.

You should consider progressive invoicing for big orders. This allows you to ask for an advance and percentage payments as the goods get manufactured and delivered. Speak with your client about setting up several agreed upon milestones to ensure you are never without working capital during the order. This will also protect your cash flow if things go sideways and your client doesn’t or cannot pay up.

Don’t Neglect Overdue Accounts

It can become simple to neglect and lose track of default or overdue accounts. However, the longer you wait to establish contact or let a client know about their overdue status, the less likely you are to receive the amount owed. You could help ensure a quick recovery by offering discounts and deals to customers who agree to settle their accounts. 

Most customers default on payments because of cumbersome payment modes. You can ensure effective cash flow management by making it easier for your clients to pay you. For instance, add a payment link or a click button to your invoices allowing customers to pay via credit card. In addition, set a process to make reminder calls after certain intervals. 

Consider Invoice Factoring

There are several benefits of factoring invoices. The major one is ensuring that you always have running cash to manage your business operations. Invoice factoring refers to selling your current invoices to a factor or a funding partner at a discount. Depending upon the terms of factoring, the lender will forward an advance which is usually 70 – 80% of the total invoice amount. 

You can use this money to pay your suppliers, buy additional raw materials, pay salaries, or invest in other things. It is important to note that factoring invoices is different from other asset-based lending since it doesn’t add to your debt or liabilities. You don’t need to refund the advance amount, except in certain special situations. For instance, if you enter a recourse invoice factoring agreement and your client defaults on the payment, you will need to refund the advance amount to your factor.

Invoice factoring is recommended for businesses that have lengthy accounts receivable periods, such as 30, 60 or 90 days. You cannot stop the operations machinery just because you are waiting for one of your clients to make the payment. You can always sell your current invoices to a factor and have them follow up with your clients. This way, factoring invoices leaves you free to focus on your operations and other parts of business. 

Infographic provided by Seacoast Business Funding – invoice factoring services

Business Bank Account Should be Separate

Many business owners, especially start-ups make the rookie mistake of mixing personal and business bank accounts and credit cards. While the initial financing will most likely come from your personal account, it’s vital to separate the two as soon as possible. You should ask your bank or credit card provider to issue a separate account for your business.

This way you can keep track of your purchase and payments reports easily. You know at all times the kind of cash you have and the money you have spent over a particular period of time. Such information is crucial when drawing up a cash flow budget. 

Liquidate Assets

There is no point holding on to White Elephants or assets that are no longer useful. Check your storage, warehouse, and any other property you have to look for inventory that has become or is about to turn obsolete or machinery that is no longer useful. Selling such assets will help you generate quick cash. Non-working, idle and obsolete equipment don’t just take up space, they also tie up your capital, which can be used more productively. 

Sale of equipment owned for a long time may allow for taxable gains since their market value may be equal to salvage value or less. This gain can be reported on your tax filings. However, you could incur a tax loss as well if the sale value is below book value. This tax loss can help offset your other profits. 

The same holds true for excess inventory since customer requirements can easily change or new materials may be introduced. It is better to sell any excess inventory quickly that is unlikely to be used in the next 6 – 12 months unless proceeds from a would-be sale are negligible and costs of retaining it are minimal. 

In fact, you should monitor your inventory effectively so as to ensure that there are no excesses or shortages. Analyze inventory movement to identify the items or services that sell quickly and asked for repeatedly. Also, determine the duds that tie up your working capital. It’s vital that you keep your inventory lean so as to free up your working capital and better manage the business cash flow. 

Maintain Buffer Cash

You need to always keep buffer money available. This can be done by finding the right breakeven point for your business and operations. You need to ensure that your business always has enough working capital funds to pay for all its operational needs. Financial experts claim that it is best to keep at least three months of outgoing as your company’s rainy day fund. 

However, you need to ascertain your unique needs and the kind of money you could require in a business emergency. For instance, how likely are your chances of acquiring a big order? For most businesses, factoring invoices saves the day when they are in need of immediate cash. However, others depend on personal funds, revolving credit facilities and overdraft. 

Control Your Cash Flow

The best way to maintain a healthy cash management system is to stay on top of your expenses. Don’t leave any opportunity to cut costs even when you start making profits. Don’t keep your focus categorically on cash inflow. Analyze all cash flow reports, especially outflow. Most businesses are brought down by unmanaged outflow. 

Don’t be shy to consider modes of financing when you feel things are tight. It is better to take up a line of credit in the short term than let your operations suffer. This could also help ensure that your product quality and customer satisfaction doesn’t fall. You could always consider factoring invoices to bridge the gap until invoice due dates if you don’t want to take on additional debt. 

However, it is recommended that you consider long-term financing rather than utilizing your working capital when looking to make large assets purchase or similar things. You may need to pay interest for a few years, but you will preserve your working capital which is vital to business operations. 

Focus on Cash Growth

If you are at a stage when you have additional cash, make sure you keep it in interest earning accounts available with most banks. You could also consider other instruments if you want better rates, such as certificates of deposit and money market accounts. However, make sure you don’t tie up the money in any long-term deposits that lock you in for specific time periods. You never know when you may require the cash. 

Anzhela Sychyk

Anzhela is a seasoned business journalist with a keen eye for spotting industry trends and a knack for explaining complex financial concepts in a clear and accessible way. With over 15 years of experience covering the world of finance and economics, Anzhela has established herself as a respected authority on all things business.