SMALL BUSINESS CASH FLOW TIPS
For anyone who has run a business, you may often come across the term cash flow. What does that term really mean to you? In my opinion, Cash flow is the lifeline of a business and critical in its growth. With money tight and bank loans hard to secure these days, many cash-strapped businesses can easily be pushed to the brink. What everyone who runs or intends to start a business must know from the get-go is that a business cannot operate very long when cash outflow exceeds cash inflow. Owners who don't thoughtfully estimate their cash flow for an upcoming period (the day, week, month and quarter) place their business at serious risk. Below are some tips that can help your business manage its cash flow without the risk of failure:
1. Create a budget & monitor the results
As a business owner, you should estimate expected cash inflows and outflows as well as estimated expenses. Make sure you follow up on the budget by occasionally monitoring it to the latter. If cash inflows are less than anticipated, figure out the reason for the shortfall. If cash outflows end up being greater than expected, understanding the cause is also important.
2. Have plan B
Unexpected events can always and cause a havoc to even the best cash-management system. It is during this time that the business needs to rely on the contingent plan to keep the operations running until things return to normal. Having a fall back plan will enable your business to stay afloat. Don't be caught off guard or as they say "with your pants down''. It is always ideal to at least have a six month cash cushion to cover six months of operating expenses. Factor that in your plan B.
3. Keep your Cash working
Keep your cash balances in interest-earning accounts, which are available at most banks. Avoid long-term certificates of deposit, which lock you in for a specific period of time, since redeeming them early may cost you interest. Either invest in penalty-free certificates or that portion of funds which you are not likely to need during the life of the CD. Set up a separate payroll account and establish a bi-monthly cycle. Bi-weekly payroll systems require 26 pay cycles a year, bi-monthly only 24, which means they save the extra administrative costs of collecting, verifying, and tabulating payroll information. Require your employees to take direct deposits to reduce the costs of writing and delivering checks. Finally, transfer payroll funds immediately before payment to keep your cash earning interest.
4. Bill your clients/ customers quickly
A key element of cash-flow management is controlling the timing of funds coming in and going out. It may be customary, depending on the industry, for a business to extend credit to purchasers. Instead of giving clients/ customers a 30-day payment period, have them make a payment within 10 days of receiving their invoice. To alleviate the pressure created by credit sales, a business should implement tactics to accelerate payment. A common technique includes providing discounts to buyers who pay their bill within 10 days. Buyers with sufficient cash to make their payment will be willing to forego availing themselves of the payment period in exchange for a discount.
5. Work with your vendors.
As much as you want your customers to pay you, your vendors want their payment as soon as possible as well. While it might seem to be a good idea to pay off your vendors right away, this can hurt your cash flow and should be avoided if possible. You should delay payment to your vendors as long as you possibly can while remaining consistent with the terms of sale. While slowing the outflow of cash is important, it is equally important to maintain a good credit rating and cordial relations with critical vendors.
6. Set timely payment policies
A sound cash-flow management strategy calls for rapid collection of invoices and timely payments. This means that the business should not pay its bills ahead of time - or late. The company should pay its bills when they are due. This ensures that its cash is working hard.
