You’ve probably heard the saying ‘cash is king’. That saying is as still as relevant as ever for businesses. After all, even if a company is profitable without healthy cash flow it can still fail.
Healthy cash flow allows a business to pay its creditors. When a company is no longer able to pay creditors, suppliers may halt supplies, lenders may decide to foreclose, and even staff might stop coming to work. In other words, a company falls into a risky position when it can no longer pay its bills.
Managing cash flow is a skill, and some businesses do it better than others. Here are 3 tips for managing cash flow effectively in your business.
1. Build an emergency fund
As the Covid Pandemic revealed – you can never fully predict how events beyond your control may affect your business. Natural disasters, changing customer demands, and new competitors are just some factors that can severely disrupt a business. Furthermore, their impacts can last for a long time.
To be better prepared, you should build an emergency fund. This is a sum of money set aside for unexpected events that could potentially interfere with your business operations. The more funds in an emergency account, the easier it will be to keep cash flow positive during challenging times. It is recommended that your emergency reserve can maintain your business operations without income for 3-6 months.
2. Encourage customers to pay right away
Even though offering customers the opportunity to delay their payment can help to grow your business, it comes at a cost. The cost is that – if you’re not careful – it can severely start to disrupt your cash flow.
There are several ways that you can encourage your customers to pay right away (or as close to).
One way to encourage customers to pay immediately is to provide multiple payment options. Payment options could include: cash, credit card, EFTPOS, and paypal. You could also stop taking cheques as a form of payment.
You could let customers know that you charge interest, or a late fee if they don’t pay on time. Not only would this encourage early payment, it also means that they would be more likely to honour a payment when it is due.
A more ‘friendly’ approach is to provide an incentive for early payment. For example, you might offer a 2% discount when a customer pays for your product/service immediately. Although a discount would slightly cut into your profits, it would do so at the benefit of your cash flow.
3. Monitor Everything
It is easier to manage cash flow when you know exactly what your cash flow situation is.
If keeping good records is not a strength of yours, hire an accountant. For a small fee, they can manage this aspect of your business, and give you a detailed assessment of your cash flow situation.
If you would prefer to do it yourself but don’t have the skills, consider attending a workshop. There are also numerous books you could read to become informed.
Last but not least, consider using Google spreadsheet templates or other software to help you monitor your cash flow.
There are more tools available now than ever before to help you monitor your cash flow. Once you can successfully manage your cash flow, you will know what you can focus on changing to better manage it.
Keep on learning
Following these tips is a great start if you would like to become great at managing cash flow. However, if you would like to continue on this journey, there are more cash flow management tips you can follow. This infographic below goes through a few more.
Good luck on your cash flow journey!