Managing cash flow in today’s business environment

Cash flow.  It’s a topic and a concern of most business owners.   Especially today, with margin pressure, inflation and simply the cost of doing business has escalated.
Whether your business is growing or struggling, managing your cash flow can be the key to business survival.  Working with privately held business, here several proactive steps to help businesses monitor cash flow and fix shortages before they cripple the business.

There are several strategies for dealing with cash shortfalls you can implement today:

Utilize both long and short-term cash management and forecasting tools. Use an annual budget as a foundation to project long-term cashflow. Identify large cash outlays and seasonal cash flow cycles. Also employ a short-term cash management tool (3 to 8 weeks) to manage weekly cash requirements. In our experience, a cash flow forecast is essential for all businesses. The forecast allows you to predict which months you can expect to see a cash deficit, and which months you can expect a surplus.

Shorten collection times and accelerate accounts receivable.  Your cash reserves can dwindle if customers regularly pay late. Send customer invoices immediately (daily) and abbreviate collection terms. Actively manage accounts receivable with established collection policies.  Consider creating a consistent collection process for the very day an invoice becomes overdue. For specific customers situations, you can offer special terms or set a policy of collecting a deposit/down payment if possible. Also, be sure your own customer collection terms are in synch with your suppliers and vendor credit terms. For example, if your customers have 30 days to pay you, but your suppliers want their pay within 14 days, a cash flow problem may strike.

Effectively manage accounts payable. Don’t rush to pay bills early. Negotiate extended terms with your vendors if possible, however avoid paying late fees and interest charges. By negotiating with vendors and suppliers, many are willing to extend payment terms with business they view as long-term customers.  By extending our payables and accelerating receivables, you can improve cash flow quickly.

Develop purchasing policies to keep inventory levels at a minimum.  A business’ cash flow cycle depends on your inventory. You spend cash to buy your supplies, and that inventory turns back into cash when it sells. Consequently, your cash flow is easily reduced by poor inventory management. Even worse if you provide poor service due to poor inventory management, customers are going to lose trust in your business and stop purchasing from you.  Steps like planning ahead, establishing systems and habits to track the quantity you order, sell and store will help you determine if you are over or under stocking, which can impact your overall cash flow.

Establish a banking relationship before you need cash – not when you need it.  A strong banking relationship is invaluable to your business. Take the time to cultivate banking relationships and build a stakeholder community that can be a resource when threats or opportunities confront your business.  The business banking manager you choose should go beyond a loan or monthly statement. They should be able to provide solutions to help your business obtain financing, enhance cash flow and stay secure. Seek a banker who is a committed advocate for your business even when times turn tough.