Cash flow management is an integral aspect of maintaining a successful business. The aim of any business is to increase its profit margin, but even the most meticulously planned business franchise can be hit with cash flow problems. This can arise from improper management of finance, operations or investment activities. By maximizing your business’s cash flow potentials, you can increase the profit margin, meet targets quickly and reduce operational cost.
Cash flow is a combination of cash inflows and outflows. Cash inflows depict when more cash is flowing into your business than its leaving and is essentially known as positive cash flow. If the reverse holds for a business, that is, more cash is leaving the business than its making, it is called a negative cash flow.
Bear in mind that negative cash flow doesn’t necessarily mean a business is running out of cash. It simply means the business is depleting its cash reserves. Businesses can improve their cash flow faster if they simultaneously combine improvements to cash inflows and outflows.
1. Plan for Future Cash Needs
Keeping accurate and detailed accounting records provides an avenue for you to build a forecast for your business based on previous results. This is why it’s important for a business to review its cash flow every month.
By being proactive with cash flow records, you are able to predict with a certain degree of accuracy your expected income and help prepare for downturns or seasonal trends. Keeping records can help you evaluate when you will be in need of cash for extra expenses and will help you plan accordingly.
2. Conduct Customer Credit Checks
Customer preference differs when it comes to payment methods. While some customers may prefer to pay with cash, other customers may prefer electronic means. If the latter is the case, ensure to conduct credit check worthiness before signing such customer up. A poor credit score means that your payments will be delayed, and late payments will hurt your business’s cash flow. One way to mitigate the effect of late payment is to set it up with a high interest rate which improves cash flow.
3. Offer Discounts for Early Payment
Customers love incentives, and you can capitalize on this to improve cash flow. Offering customers discount for early payment essentially creates a win-win situation for both the business and the customer, because early payment means more cash at hand to perform other necessary functions. However, offering excessive discounts can eventually reduce your profit margin, thereby having a negative effect on your business. Be careful about excessively discounting products or services, even if it improves your cash flow.
5. Pay Suppliers Less
One way to maintain and improve cash flow is to establish a cordial relationship with suppliers. By communicating regularly with suppliers, you create a chance of getting improved terms. Convincing your supplier to extend payment terms beyond the regular for large purchases will manage cash outflow.
6. Outsource Certain Functions
The world of freelancing has had an impact on how we do business tasks. Gone are the days when you needed to employ full-time staffs. You can simply outsource certain functions to save cost.
Typical examples of business functions that can be outsourced include IT Management, human resources, accounting and marketing functions. In general, outsourcing can save your business by cutting down on expenses, help increase your business efficiency as well as offer a flexible staffing model during bear-runs of the business cycle.
Creating an improved and healthy cash flow for a business is a result of efficient business operations management. The above steps work hand in hand with making the right decisions regarding marketing strategies, customer acquisition, customer service as well as product or service development.