Cash Flow Critical

Cash is king when it comes to the financial management of a growing company. The lag between the time you have to pay your suppliers and employees and the time you collect from your customers is the problem. The solution is cash flow management. Cash flow management means delaying outlays of cash as long as possible while encouraging anyone who owes you money to pay. These four steps will help you keep track of the money coming in and out of your company.

Measuring Cash Flow

Prepare cash flow projections for next year, next quarter and next week. An accurate cash flow projection can alert you to trouble well before it strikes. Understand that cash flow plans are not glimpses into the future. They're educated guesses that balance a number of factors, including customers' payment history, upcoming expenditures, and your vendors' patience. Watch out assuming that receivables will continue coming in at the same rate and that payables can be extended. Make sure you have included expenses such as cash capital purchases, loan interest, principal payments, and that you have accounted for sales fluctuations.

Start your cash flow projection by adding cash on hand at the beginning of the period with other cash to be received from various sources. In the process, you will wind up gathering information from various sources. Ask the same question: How much cash in the form of customer payments, interest, service fees, debt collections, and other sources are we going to get in and when?

The second part of making accurate cash flow projections is a detailed knowledge of amounts and dates of upcoming cash outlays. That means not only knowing when money will be spent but on what. Have a line item on your projection for every significant cash outlay.

As difficult as it is for a business owner to prepare projections, it's one of the most important things one can do. Projections rank next to business plans and mission statements among things a business must do to plan for the future.

Improving Receivables

If you got paid for sales the instant you made them, you would never have a cash flow problem. Unfortunately, that doesn't happen. You can still improve your cash flow by managing your receivables. The basic idea is to improve the speed with which you turn materials and supplies into products, inventory into receivables, and receivables into cash. Here are specific techniques for doing this:

  • Offer discounts to customers who pay their bills rapidly.
  • Ask customers to make deposit payments when ordering.
  • Require credit checks on all new non-cash customers.
  • Get rid of old, outdated inventory at discounted prices.
  • Promptly issue invoices and follow up immediately if payments are slow.
  • Track accounts receivable to identify and avoid slow-paying customers.

Managing Payables 

Sales growth can conceal a lot of problems. When you are managing a growing company, you have to watch expenses carefully. Don't be lulled into complacency by simply expanding sales. Any time and place you see expenses growing faster than sales, examine costs carefully to find places to cut or control them. Here are some more tips for using cash wisely:

  • Take full advantage of creditor payment terms.
  • Use electronic funds transfer to make payments on the last day they are due.
  • Communicate with your suppliers so they know your financial situation.
  • Carefully consider vendors' offers of discounts for earlier payments.
  • Don't always focus on the lowest price when choosing suppliers. Sometimes more flexible payment terms can improve your cash flow.

Surviving Shortfalls

In the future, you may find yourself in a situation where you lack the cash to pay your bills. This doesn't mean you're a business failure. You're a normal entrepreneur who can't perfectly predict the future. There are normal, everyday business practices that can help you manage the shortfall.

The key to managing cash shortfalls is to become aware of the problem as early and as accurately as possible. Banks are wary of borrowers who have to have money today. They'd much prefer lending to you before you need it. When the reason you are caught short is that you failed to plan, a banker is not going to be very interested in assisting you. If you assume that you will someday be short on cash, you can arrange for a line of credit at your bank. This allows you to borrow money up to a preset limit when you need it. Since it's far easier to borrow when you don't need it, arranging a credit line before you are short is vital.

If bankers won't help, turn next to your suppliers. These people are more interested in keeping you going and probably know more about your business. You can often get extended terms from suppliers that amount to a low-cost loan just by asking. That's especially true if you've been a good customer in the past and kept them informed about your financial situation.

Ask your best customers to accelerate payments. Explain the situation and consider offering a 1-2% discount off their invoice. You should also go after your worst customers (those whose invoices are more than 90 days past due) and offer them a steeper discount if they pay today.

Choose the bills you'll pay carefully. Don't just pay the smallest ones and let the rest slide. Make payroll first. Unpaid employees will soon be ex-employees. Pay crucial suppliers next. Ask the rest if you can skip a payment or make a partial payment.

In carefully managing your cash flow, you will find the bumps in the road of business to be more manageable. Cash flow is critical and has been the nail in the coffin of a lot of growing businesses and start-ups. By employing some of these strategies, you’ll ultimately be more successful in your entrepreneurial endeavours.