3 Tips For Managing Cash Flow

If you aren’t an accountant – and, okay, even if you are – managing cash flow can be a daunting task.  Cash flow management, essentially keeping your money as long as possible and being able to project how much of it is headed for your pockets at any given time, serves a few purposes.  It’s a great forecasting tool and a fine way to keep your business healthy, and, scary as it might seem, it’s important to get a feel for it.  Let’s just dive right in, shall we?  I promise it’ll be fun, and, we won’t go too far into the deep end J

#1: Project it Correctly

Projecting how much money you’ll have at any given time (or, for starters, just one specific time in the future) is important because it allows you to make other big decisions and, as the name would suggest, plan or project for the future.  Were you thinking of upgrading a piece of machinery in your warehouse?  Maybe thinking of changing vendors for a specific product?  Perhaps you’re even considering giving your employees raises.  Relying on numbers your accountant prepares for you is perfect, but, if you’re your own accountant, you’ll have to learn to project cash flow yourself.  You’ll have to make educated guesses about a number of things, including your customers’ payment histories and upcoming expenses.

Here’s what you can do in two detailed steps:

1. You’ll have to add up all of your cash on hand, plus the cash you expect to get from various other sources later on.  You’ll need to talk to all of your Sales team, Service or Support members, and of course your Credit or Finance department.  You’ll be asking the same question of all of them: How much cash (in its various forms, payments, interest, fees, etc.) are we going to get, and when are we going to get it?
2. You’ll then need to assess when your cash is going to be spent, and on what.  The more line item detail you have, the better – and, that includes items rent, utilities, inventory, salaries and wages, benefits, standard office supplies, advertising… Everything you spend money on for your business, really.

If you can be very thorough in your research (or just very honest with yourself in how your business spends its money), this is all you’ll need to do.  It’s a difficult undertaking, to be sure, but, if you can prepare one of these cash flow projections per quarter (or, more or less frequently, depending on your preference or your financial state), you’ll know exactly how much room you have to make other adjustments, like the aforementioned big purchases, raises, or anything else you might want to do.

#2: Improve Your Receivables

If you got paid for things the minute you sent out invoices, you’d never have any cash flow problems.  That’s usually not how it works, unfortunately.  Bearing that in mind, there are certain things you can do to ensure you get your money a little more quickly, if not instantly; you can start by making tweaks at the inventory level and making other adjustments at the customer level.  For example:

1. If you have old inventory, don’t just keep it around – sell it for whatever you can get.
2. Invoice customers as soon as possible, and follow up promptly if you sense any sluggishness.
3. Automate payments whenever possible,  Whether this means putting customers on a recurring payment subscription plan or simply using integrated credit card processing that plugs into your accounting system, this will get you your money more quickly.  In the case of using integrated payment processing, or even a virtual gateway, you'll save time every day too, which can translate to monetary savings in increased productivity.
4. Ask that customers make deposits on orders as soon as they’re taken; identify customers that have a history of paying you slowly and institute a COD (collect on delivery) policy.  If you’re not sure how to do that, an outside service like UPS can help.  If this doesn’t help, you can simply refuse doing business with those customers until you can be certain they’ll pay you on time.
5. Incentivize on-time or early payments by offering a small discount.

For a closer look at improving receivables cash flow, this piece on avoiding late payments from customers touches on similar ground and provides some additional tips too.

#2a: Improve Your Payables

If your sales are good, you might think everything in your business is hunky-dory – unfortunately, that isn’t usually how it works either.  Great sales can hide problems originating in your expenses, so it does good to pay close attention to how much money is leaving your pockets and when.  Here are some things you can do to lessen the strain and keep money in your pocket longer:

1. Take advantage of payment terms to the fullest extent.  That means if a creditor or vendor demands a payment in 15 days, don’t make it in 10.
2. If vendors offer you discounts for early payments, consider whether or not a discount will help you before jumping on their offers.  If you need to hold onto your money, you may want to let it ride until the payment becomes absolutely necessary.
3. Rather than send payments via post, use electronic transfers to make payments on things the day they’re due.
4. Don’t choose vendors simply on the basis of price.  Vendors with payment terms that serve you in your financial situation may be better for business overall than vendors with rock-bottom prices that need their payments now.

Let your vendors know about your cash flow situation if necessary.  If you ever need to put off making a payment, at the very least the vendors will have advance warning, and they may even be sympathetic.

#3: Survive Real Deficits

While tip #2a is designed to help prevent cash shortages, sometimes it just isn’t enough and you end up in the red anyway.  This doesn’t mean you’re a bad person or you’ve failed as a businessperson – it just means you couldn’t accurately predict the future, and, until we humans develop some form of ESP, you’re off the hook for that one.  Not being able to pay a bill is a completely normal situation, and, there are some measures you can take to lessen the stress from a bad cash flow situation like this, too:

1. Preventative loans help a great deal, but, banks will be much more apt to lend you money if you ask for it in advance – the longer time you give yourself, the better.  If you come to a bank asking for money you need that day, you’ll likely be rejected.  (You can approach third-party loan companies for next-day loans, but you’ll incur astronomical interest rates, so I would advise against this unless absolutely necessary.)
2. Your bank will come in handy for more than just loans.  You can arrange for your bank to give you a line of credit, which allows you to borrow money (like a credit card) up to a certain limit.  I would take the time to open a line of credit even if you don’t anticipate being in the red – it’s just a good business practice, akin to carrying a personal credit card in case of an emergency.
3. Ask your suppliers for help if you can’t get it from the bank, as those vendors probably know you and your business better than your bank does, anyway.  You can probably get what’s essentially a low-cost loan from vendors just by asking for it, especially if you’ve already informed them of your situation and have been a good customer in the past.
4. Using factoring may help.  Factoring is when you hire an outside service to collect payments on unpaid invoices for you.  The factoring company is compensated by taking a percentage of your invoices, but, you’ll be paid immediately for any invoices the factoring company takes over, so this is a good way to put some money back into your pockets immediately, if only as a last resort.
5. You can also ask your most promptly-paying customers to pay you more quickly, taking care to explain your situation and incentivizing them by giving them a slight, one-time discount, too.  You can also go after your very late-paying customers, offering them discounts for paying quickly as well – if you can get them on the phone.
6. In extreme situations, you can sell your machinery or offer your office furniture or similar assets as collateral on a loan.  In these situations, be sure to make your payments on time or you could risk permanently losing the items you handed over.

Concluding Thoughts on Managing Cash Flow

Okay, so I lied a little in the beginning.  Cash flow management isn't such a fun topic unless you're thoroughly in the black - and, even then, you need to continue to perform cash flow projections to ensure you remain there.  As long as you follow the steps here, you should be at least armed with some good information that will help you in the future.