Cash flow management for a healthy business
In business, cash is and will always be king – and a primary reason for business failure is running out of it. With some effective cash flow management processes in place, this could be an avoidable situation.
The bottom line is, when you’re waiting to be paid by a customer but need to pay out either suppliers, employees or other business related bills, the cash flow is threatened. In an ideal world, holding on for the invoices to be settled before paying out on business commitments would be the easiest cash flow management solution. However, in business, it often just doesn’t work that way!
So implementing some processes to help ease the pressure on cash in the business is a wise move.
Keep a close eye on cash flow – this one is simple but effective and sometimes overlooked until it is too late. Knowing how much cash is in the business at any one time will help with payment planning, and enable steps to be taken to recover money owed to help alleviate a shortfall. There should be a cash flow measurement plan in place to ensure all business expenditure is planned for on a month to month basis, with a surplus to cover unplanned or unknown costs – or to cover shortfall in the event of delayed payments from debtors.
Overhaul the invoicing process – there are a variety of actions that will help make getting money in from customers more efficient. Firstly, invoice promptly, and ensure there are steps in place to follow up on invoices to ensure they have been received by the right person, include the right details (such as purchase order numbers or any other required details) and have clearly agreed payment terms. Then, it’s a good idea to remind a customer about the imminent due date of an invoice, and of course, get in touch immediately if it’s late. It is also worth thinking about incentives for customers, such as discounts for those who settle quickly or early.
Be realistic on payment terms – for many businesses, the buzz of getting a new customer on board, particularly if they are of a significant size, might override sense when it comes to appropriate payment terms. Some larger businesses may have longer supplier payment terms, which could present a problem for cash flow. Trying to negotiate shorter terms in these circumstances is always a good idea. If that isn’t possible, then ensuring a diverse customer base is vital to ensure cash flow from a variety of sources. The old adage of not having too many eggs in one basket definitely applies here.
The importance of cash flow management cannot be overlooked, and the earlier a potential issue can be identified, the earlier it can be planned for – through borrowing, invoice factoring or delaying expenditure to cope with a shortfall. Implementing some simple steps now could one day be the saviour of the business.