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.
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.
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.