Every phase of business cycle needs different operating strategies. Once the business starts prospering as a going concern, cash flows require a serious attention. Healthy balance sheets may simply crash if no check is present on cash flows.
Liquidity of cash is utterly required to lubricate the business wheel. The minute this lubricant starts drying out, consequences will be evident. Working on each section of cash flow statement i.e. operating, investing and financing activities stabilizes the influx of cash which is the lifeblood of any business. Here are a few methods and ways to improve cash flow that will work wonder for your small business cash flow management.
Operating Activities
1- Schedule a Receivable Before Payable:
Structuring your payable and receivables is fundamental to cash flow management. Paying your bills earlier than receiving income will let you in a cash crunch. The budget deficit in future may expose you to penalties if payments are not as per terms and conditions. Negotiate maximum time lapse for payable and minimum time lapse for receivable. Offer some discount as an incentive to your debtors for earlier payments. Keep a regular follow up to monitor your cash situation. Regularly chase the clients via reminders and payment alerts.
2- Pay Electronically:
Pay wisely. A business credit card is a great tool to defer actual payment up to 21 days. Conserving cash for good three weeks is a great idea to manage liquidity of any business. Remember to exercise caution. Piling too much debt can play havoc too.
3- Cash Injection through Lucrative Sales:
Once cash flow position appears to be staggering, boost your revenue via lucrative sales. Cutting your profit margin will at least keep the liquidity of your business consistent. Also, if you manage to satisfy clients with your product they will stick to your brand. You can make up the profit deficiency well ahead by increasing prices later.
Investing Activities
4- Hiring a Pro Accountant:
A pro accountant can become your smartest investment due to his valuable contribution. He can better prepare and interpret cash flow projections, highlight important overlooked areas, critically analyse your cash flows and guide you about appropriate borrowing time.
5- Revisit Your Stock:
Some stocks are simply dead. Not only they occupy space but also locks up the cash. Try to get rid of them as early as possible. Even if you could recover partial cost squeeze the cash. Stock with no demand is a great hindrance to managing high demand products. Revisiting stock is necessary to keep fresh inventory in circulation. However, nature of business also dictates the frequency of this activity.
6- Switch to Business Saving Account:
If you foresee that you can hold the cash for a relatively long period than switch to business saving account. Generating another income stream (although very small) will, of course, impact your cash flows positively.
Financing Activities
7- Line of Credit Instead of Loans:
Always keep a line of credit open as a backup for urgent financing. LOC charge you interest only up to the used amount and not on the entire limit as opposed to conventional loans. Keep a keen check on cash movement and avail the facility before cash completely dries out.
8- Corner Low Credit Clients with High-interest Rates:
Always check the creditworthiness of your client’s prior to making credit sales. Hedge the risk of late payments with higher interest rates. Any damage for late payments will be compensated by the penalty. Also, maintain a provision of bad debts. This gives a realistic estimate of actual cash position.
9- Conserve Cash:
Financing new ventures definitely demand wholesome amount. Sacrificing all cash in a go will obviously lead you nowhere. Maintaining cordial terms with financial institutions greatly help in acquiring long-term loans. Freedom to utilize funds as per financial strategies helps your business grow.
10- Lease can be Considered Instead of Purchase:
The cost of lease spreads over sufficient time and to improve cash flow, businesses agrees to pay the extra amount for this added time margin. A steady increment in lease rentals enables the business to sustain cash stream for operational activities. Also, leasing land, plant & machinery will be accounted for as an expense rather than an asset and therefore can be written off.
11- The Last Resort: Factoring:
If all possible cash securing strategies turn unsuccessful then factoring is the last resort. Selling trade receivables to factor (third party) at a discount is although costly but you can instantly get 75%-90% of the locked amount. Not to forget that you will be paying enormous factoring fee so use this option as your last choice only.
