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Although entrepreneurs must consider a seemingly endless array of issues when running a business, cash flow ranks as a top priority for ensuring the company's success. “Cash is king” when it comes to the financial management of a growing company. Whether it is a multi-million corporation or the tiny mom-and-pop convenience store on the street corner, cash is the lifeblood of the business. As there is always a lag between the time businesses have to pay their suppliers and employees and the time they collect from their customers, it will always create the problem. In today's uncertain economy with ever rising interest rates, many small businesses with limited financial training are having problems staying alive. In fact, 63% of new businesses do not survive six years. The primary reason is bad cash flow management. As a result, the question to answer for small businesses is: how should a small business manage its cash flow effectively? Cash flow management is the process of monitoring, analyzing, and adjusting business' cash flows. For small businesses, the most important aspect of cash flow management is avoiding extended cash shortages, caused by having too great a gap between cash inflows and outflows. In other words, cash flow management means delaying outlays of cash as long as possible while encouraging anyone who owes you money to pay it as rapidly as possible. There are different ways to achieve that: Measuring cash flow You need to perform a cash flow analysis on a regular basis, and use cash flow forecasting so you can take the steps necessary to head off cash flow problems. 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. Then develop a detailed knowledge of amounts and dates of upcoming cash outlays. That means not only knowing when each penny will be spent, but on what. Many software accounting programs have built-in reporting features that make cash flow analysis easy. This is the first step of cash flow management. Improving receivables or fast collection This pertains to basic ideas to improve the speed with which you turn materials and supplies into products, inventory into receivables, and receivables into cash. For instance: Try to speed up customer orders by having them fax their orders to you, Get rid of outdated inventory by offering discounts to customers who pay their bills rapidly, ask customers to make deposit payments at the time orders are taken, issue invoices promptly and follow up immediately if payments are slow in coming, track accounts receivable to identify and avoid slow-paying customers, etc. Disbursing your money slowly Just the opposite of collecting at the earliest possible moment, you should never pay a day sooner than you have to, unless you get a discount for doing so. You want to keep your money in your hands as long as you can. Use business credit cards for small business expenses: travel, lodging, etc. With credit cards you typically do not have to make payment until 25 days after receiving the statement. Surviving shortages The key to managing cash shortages 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 would much prefer lending to a business before you need it, preferably months before. When the reason you are caught short is that you failed to plan, a banker is not going to be very interested in helping you out. No extra money in your bank account Keeping too much money in the bank accounts often leads to paying for bank services. This money could be used more effectively elsewhere such as to pay off a loan or to invest at a more competitive rate. You need to have ideas on how much money to leave in the bank or alternatives to compensate the bank. Take some time to find out what your minimum balance needs to be. Reviewing credit policies and credit histories of customers Managing customers' credit is an important part of cash flow management. Remove unprofitable customers, those that cost more to maintain than they add to the bottom line. Flag those who have a history of slow payment. If a customer has a history of slow payment, changing the credit terms or even eliminating credit entirely may be necessary. “Cash is king" is an expression sometimes used in analyzing businesses. It refers to the importance of cash flow in the overall fiscal health of a business. The outflow part of cash flow is never a problem; money will always run out of business easily. Keeping the money coming in on a regular, sustained basis is the challenging part of cash flow management. You have to have money coming in regularly to maintain an adequate cash flow for your business, not just endlessly streaming out. Monitoring your cash flow and taking steps to shorten your cash flow conversion period will go a long ways towards eliminating those dangerous cash flow gaps.
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cash, flow, management, small, business,
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