How to Improve Your Business Cash Flow Management Skills

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As it relates to financial management, cash is important to a growing and developing company. There may be a long wait time between collecting money from your customers and having to pay your employees and suppliers. Therefore, you must know how to manage your cash flow. Cash flow management allows you to delay cash outlays as long as it is possible while you encourage your customers to pay on time or pay sooner rather than later.

Cash Flow Measurement

You should have a projection of your cash flow for up to one year. You should also be able to view and manage your cash flow for the next business quarter. When your cash flow forecast is accurate, it makes it easier to stay abreast of money that needs to be collected and keeps your business out of financial trouble.

Cash Flow Planning

You also need to understand the meaning of a cash flow plan. It is not necessary a look into the future, but an educated guess balancing several factors, which could include the payment history of your customers and future required expenditures for the business as well as how long each vendor will wait for payment. You should never assume that a customer will pay nor justify that receivables will be revolving at the same rate as in the past. You should make room for fluctuations, inflation, interest and loan payments as well as other expenses.

The Forecast

Begin projecting cash flow by looking at the cash that you have on hand and cash that you will receive from other sources. Gather all of this information from your collection and finance department, salespeople and service reps. Find out how much you will receive for each customer and when. You should also find out whether there are any particular collections pending for bad debts and any earnings on interest. This will give you a good idea of what to expect. Secondly, you must have an in-depth knowledge of the dates and the exact amounts of the future cash outlays. You also need to know when funds will be spent and what they will be spent on. This may include inventory, rent, salaries, utilities, debts, office supplies, advertising, equipment and taxes. Even though, it is an intensive process to prepare forecast or projects for cash flow management, this is one of the most significant exercises for any business owner. In comparison to a business plan, cash flow projections rank as high among the important things that a business owner should take care of.

Account Receivables

Not many business owner’s like to deal with accounts receivables that are outstanding. Yet, it is important to collect what is owed to the company. Therefore, you should have an entire department to handle this. This is one of the most effective ways to improve your cash flow. Once you can speed up payment from customers for outstanding money owed, you stand a better chance of efficiently managing your cash flow. You can also improve cash flow by:

  •       Offering customers discounts to pay their bills faster
  •       Asking for payment deposit on orders before delivery
  •       Credit checks for noncash and new clients
  •       Sell outdated and old inventory to free up cash
  •       Send out customer invoices on a timely basis
  •       Keep track of your accounts receivables

For payables, have a good working relationship with vendors so you can ask for discounts for paying early. Instead of paying creditors at an earlier date, take advantage of their payment due dates and pay on that date and not sooner. If there is a delay in paying your creditors or vendors, be sure to communicate with them to maintain their trust.

 

What to Expect from a Lender During the Business Loan Application Process

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Prior to getting a small business loan, lenders will want to ensure that you can repay the loan. Every business loan is risky to the bank.  In fact, every loan carries its own risks. Financial institutions do not want to take as much risk. So, you have to be able to show the bank that you can afford to make payments in a timely manner. Banks look for security. They look for a solid financial history and will check your business background. Below are some of the basic things that financial institutions look for a business loan approval.

Credit History

One of the main factors that lenders consider is the condition of your credit history, both personal and business. They will look at your credit score, acquired from all three credit bureaus. Your social security number will be used to access your personal credit score and your EIN number used for the business credit. It is recommended that you obtain your own credit report from the credit bureaus prior to shopping for a business loan. It gives you time to review it first and fix any mistakes.

Working Capital

Working capital is also important to the business loan process. The financial institution looks at your existing assets and liabilities, subtracting both to come up with a working capital. The bank views working capital as available cash to pay existing debts and to keep the business in operation. If you have no working capital, the bank sees this as a serious risk.

Ability to Pay

Your business must show reasonable cash flow and collateral in the form of assets. This shows the bank that you have the ability to pay the loan. You previous and forecasted financial statements will be assessed. Your personal tax return for the previous three years will be also observed. The bank wants to see how complicated your situation is. They want to see if your business is making a profit or just getting by. You can also show proof of any new client contracts or future business opportunities to give yourself a better chance for loan approval.

Collateral For Secured Loan

Many lenders will accept collateral as security for the business loan. Most small business loans require this. You can use both personal and business assets as collateral. If you had plans to buy equipment for the business, for example, using the approved loan amount, the lender will want you to use the equipment as collateral and guarantee the loan personally.

Business Experience and Reputation

Your business experience and reputation will be in question. You have to prove that you have experience in doing business in that particular industry. If you don’t have experience in the industry, you should be able to show experience as a manager or similar or hire employees that do have the experience.

Expediting the Loan Process

To expedite the business loan process, lenders will want to see a strategic business plan. The business plan should include profit and loss statements, balance sheets and cash flow forecasts of up to three years; past and future. You also have to show your accounts receivable and payable activities, breaking them up in thirty, sixty and ninety day segments. Market research data and competitor research is also helpful.

It is best to be organized and prepared before applying for a business loan. It will save you time and help you to get the approval. Get all documents in order prior to finding out what is required.