5 Ways to Improve Your Company's Cash Flow

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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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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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.

How to Have Considerable Cash Clow for Small Companies

A successful business is not only having the right product or leading the market, there is also a lot going on behind the scenes and a great part of it is having a rigorous recordkeeping practice and a very solid cash flow. A healthy cash flow is not only a sign of a profitable business, but also businesses (especially smaller ones) need to prepare for future events; market changes and meet tax and other obligations. However, history has shown us that the lack of understanding of basic accounting principles have made small businesses fail. So here is a brief introduction on how to keep track of your cash flow. 

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First, let’s define an operating cycle. It is the complete loop through which cash flows, from purchase of inventory through the collection of accounts receivable. It measures the flow of assets into cash and tells you the amount of time you should be able to finance, according to your operating cycle from purchase to receivables. This period of time should be carefully taken into account, especially since capital providers (most likely lenders) require a return on their investment; hence the longer the operating cycle, the more cash you need to minimize the amount to be financed without actually running out of cash.

Another reason for analyzing your cash flow is that it will show whether your daily operations generate enough cash to meet your obligations and if the more cash outflows actually mean major cash inflows from sales. In turn, these movements will determine if your whole operation cycle result in a positive cash flow or in a net drain. To avoid the latter, here are some recommendations to have a healthy cash flow to help make your company profitable, sustainable and, if it’s in your plans, bigger.

1. Plan ahead. Make sure you are aware and have an updated list of your financial requirements such as premises, equipment, staff and working capital. It is always safer to have enough cash at hand to meet next month’s cash obligations. That way you will ensure you can meet such obligations, and an accurate cash flow projection will help you identify and eliminate deficiencies or surpluses in cash and compare figures to those of past months.

2. For most startups and small businesses you will not need certified financial statement, compiled statements, which an accountant prepares with a letter stating that the numbers are based on the information you have provided, will be just fine. Keep frequent financial statements at least on a monthly basis in order to compare your income to that of previous periods. The ultimate objective will be to design a plan to provide a well-balanced cash flow, so when excess cash is revealed it could be that there is excessive borrowing or idle money that could be invested; or if on the contrary cash-flow deficiencies are found, business plans could be implemented to provide more cash.

3. Always keep an eye on key income statement percentages. For example if you are in the manufacturing business, the cost of your goods sold percentage should be more or less the same as the competitor’s.

4. Do not delegate the authority of signing checks or purchase orders. Always keep track of the cash outflow. And never use the money that you have withheld for payroll, sales or for other taxes. This money belongs to the Internal Revenue Service, Social Security Administration and your state’s sales tax authority and you will need it to pay your obligations to them. 

5. Try to collect your receivables as quickly as possible. The longer it takes a firm to collect a customer’s unpaid balance, the more revenues it loses because it is less likely that you will receive full payment. But the faster you collect them, the shorter your operating cycle will be.

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6. Apply stricter credit policies to make more customers pay their purchases in cash to increase your cash on hand and reduce uncorrectable accounts. However, bear in mind that the tighter the credit, the less opportunity for clients to purchase your products or services; so keep an eye on how tight the rope must be to allow some room for adjustments.

7. One of the biggest weaknesses of small businesses is setting the price of their products or services. Pricing is the key element to getting a profit and having a good cash flow; so have a clear and complete knowledge of your product’s market, distribution costs and competition and monitor them frequently to make adjustments when necessary.

8. If necessary, take out short term loans such as revolving credit lines and equity loans to cover your cash flow problems.

9. Not all increase in sales actually means more cash flow. You may have sold on credit, meaning that your accounts receivable would increase but not your cash. It will take up to 30 days or more for receivables to be collected, and in the meanwhile your inventory will have depleted and will need to be replaced, leaving your company’s cash reserves quickly drained. Use a computer to help you track this critical data and give you time to consider those situations and be prepared.

10. And finally watch what you spend and why. Expenses should be carefully analyzed to make sure they are necessary and reasonable. When it comes to accounts payable, if a supplier offers you a discount for early payment, take it; but if there is no discount and you have 30 days to pay do not pay in a week. And whatever you do, always be aware of penalties for late payments and keep your credit record as clean as possible.