Cash-flow is the life blood of any business. Maintaining an adequate flow is, therefore, imperative, for the smooth running of a business….more so for a small business, which might not get institutional loans readily. Cash-flow adequacy involves narrowing or closing cash flow gaps. Analysing the following components will help identify problem areas that lead to cash flow gaps for your business.
Improve Accounts Receivable
Accounts receivable means money owed by customers. It makes up a sizeable portion of the cash coming into a small business, so keeping a close eye on them is vital to improving cash flow.
Maintain a real-time report on the total amount of the business’s receivables, both in absolute money terms as well as customer-wise. This will help to: Have the receivables-aging analysis. Track the habits of your customers over time. Help identify customers who are likely to need to be prompted to pay
Ease of Payment:
Make sure that your customers pay you on time. Ensure: Prompt issue and dispatch of invoices. Highlight the “Pay by” date so that customers know exactly when payment is due. Give easy and fast options for payments, such as fax and online methods. Offer discounts to those who pay early.
Institute a Credit Policy
Try to anticipate customers’ credit needs before they ask. For new customers, do a credit-check and ask for several references. Take a small deposit on new orders, to make sure you have some cash on hand.
Institute a collections policy:
Collecting money may not always be easy. Ensure that: Your policy indicates when you begin efforts to collect on a payment. Many business owners stick to a formal reminder system that takes on a more serious tone as the delay increases and eventually involves an attorney and, ultimately, a collection agency. Different customers require different approaches — A chronic late-payer may require different handling than someone who has slipped up on a single occasion.
Improve Accounts Payable
Accounts Payable means money that you owe to your vendors. It is to your advantage to keep cash on hand for as long as possible, which means carefully monitoring your outflows.
Manage your due dates:
As a practise, pay an invoice on the day it is due — paying early can leave you short of cash at a crucial time.
Extend your payment times:
Check if you can work out an agreement with your vendors on a spread out payments plan.Strengthen your relationship with vendors in case you need to delay payment in the future. Remember that those who offer the lowest prices may not necessarily be the most flexible – take this into consideration when choosing who to work with.
Improving Inventory Management:
Good inventory management ensures a robust sales management which in turn helps demand forecasting. Inventory that is not being transformed into cash is useless. If you have out-of-date inventory, sell it for the best price you can.
Also, it is commonly believed that 80% of your revenue comes from 20% of your inventory. Assess which of your products this applies to, so that you can make informed decisions about how much of a certain item to order – and when. Once you get a grip on your cash-inflows and outflows, you will find it easy to steer clear of 2 dangerous business situations – too much cash or too little cash.