It does not matter how big your business is and how
profitable it has become. If you are running a company, there are some things
that you must worry about in order to be successful, one of them is your cash
flow.
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| Image courtesy Ken Teegardin | Flickr |
Cash flow is defined as the net amount of cash and
cash-equivalents moving into and out of a company. It is the difference in
amount of cash available at the beginning of a period (opening balance) and the amount at the end of
that period (closing balance). We say it is positive when the
closing balance is higher than the opening balance. Having a positive cash flow
signifies that a company's liquid assets are growing, therefore, the company
can be able to pay its debts, reinvest in its business, return money to
shareholders, pay expenses and plan ahead against possible financial
difficulties. Every company is always trying to keep a positive cash flow since
it is used to assess the quality of its income. Positive cash flow indicates
whether the company is positioned to remain solvent or not.
In terms of success, most companies’ dream is to
have a regular cash flow. The right way to do it is by collecting receivables
as fast as possible and slowing down payables without jeopardizing the
relationship with suppliers. Nobody wants to deal with a situation where
payables (debts) are due before the receivables (money that hasn’t been
collected yet) come in.
There are many ways to handle cash flow issues. One
could be extending your accounts payable period by using a credit card to pay
suppliers. If you pay with a credit card, your supplier gets immediately paid
and you get a few more weeks to pay the card down. However, this alternative
can be also a problem since you probably don't want to deal with interest
charges.
As the credit card alternative
often is not the most useful one, in this article Adam Greene will share a few tips on how your company can improve
its cash flow effectively.
1. Be well prepared for the future:
Putting together a 12-month forecast for your
company’s cash flow is definitely the best way to go. You need to be prepared
for the costs associated with your business operation, and mapping things out
week a week will help you see where to expect changes in expenses ahead of your
big sales season and where several payments might come due all at once.
Sometimes small companies are not prepared for all
the costs associated with growing quickly –more employers, a bigger inventory
and more debts. By using pen and paper to plan what is going to happen with
their cash flow, they can prevent a financial disaster.
2. Balance your terms:
You may want to evaluate your paying terms in order
to keep a positive cash flow. This means that your average payable should
always exceed your average receivable.
Having a balanced customer and supplier terms is
always a good way to structure your business. In order for your company to
achieve this, you should check the terms you're offering to customers and
evaluate if they work for you and how your customers are performing to those
terms.
3. Be disciplined:
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| Image courtesy OTA Photos | Flickr |
You should reduce your receivable period after
selling a product or service to your customers. A way for you to make this task
easier is by keeping track of your activities and documenting that information.
Using a software to help you remember when to collect your receivables can be
quite helpful.
This discipline should also be reflected on your
payables operations. By settling all your debts with suppliers on time, you are
ensuring a healthy business relationship that is likely to give you the chance
to negotiate for future discounts or payment terms better suited to your
business cycle.
4. Beware of your inventory:
Check which products tend to be more prone to be
sold and try to keep a small inventory of the products that you only sell
sporadically. Having money invested in an inventory that is never going to be
sold, is a waste of resources that could be better used in items that can
return your investment more quickly. In other words, try to avoid having tons
of money tied to an inventory.
5. Identify which customers help you with your cash flow:
Not because a customer is a regular or an old one,
it means is going to have a positive impact on your cash flow.
Evaluate your customers and identify which ones are
the worst payers. For these type of customers, you may want to plan a strategy
in order to better approach them and improve the paying terms. Sometimes small
accounts are more profitable than big accounts with horrible terms.
If you currently run a small company and still
don’t know how to have a better cash flow, you can click here and find more information.
