Cash flow management is one particular area of business that many business owners tend to overlook. It is not a fun topic but it is immensely important and the business that is able to effectively manage its cash flow is more likely to be successful.
Most business owners tend to think of cash flow as payments management or the ability for a business to control its outgoings and receipts. While this is valid, I tend to take a bigger view of cash flow. I think of cash flow as encompassing the ability of a business to attract leads, convert them to customers, retain them as customers in the long term and ultimately increasing earnings per customer. This is on the income side.
On the outgoings side, I would consider things like establishing a viable product cycle from research and development, to ordering products, paying suppliers, staff and other overhead., plugging leaks and negotiating favorable payment terms on all accounts payable.
The advantages of effective cash flow management are many.
- Proper cash flow management guarantees that your business will have enough funds for operational purposes.
- Sufficient funds mean you will be able to meet all your financial commitments, including those to suppliers.
- The added advantage of this is that you will be able to maintain a great relationship with your suppliers.
- Paying your bills on time guarantees that you will still have access to your suppliers in the one off event that you are unable to maintain your commitment at any point.
In short, cash flow is the lifeblood of every successful business.
For many business owners, even if they understand why it is important to properly manage their cash flow, they have no idea what they actually need to do to make this happen. If you are in doubt about what to do there are several steps you can take to improve the flow of cash through your business.
- Have a business plan.
It is not enough to simply have an idea for a business. You should also have a written plan that outlines what your goals are and how you are going to achieve them. In preparing your business plan you should document projected income and expenses, and these figures will help you to understand what to expect in terms of your cash flow.
- Have a clear credit/cash management policy.
A good credit/cash management policy is as important to any successful business as having a business plan. In some ways it is like the blueprint of the business – a guide to what is allowed and what is not. Determine how many days credit, if any, you will be extending to customers, when bills will be paid and what means will be used (cash, cheque etc) and how payouts will be done. Once you’ve decided on these terms, try at all times to stick to your policy as far as is possible.
- Know your customers.
Having a clear knowledge of who your customers are is also important to the management of cash flow. What information is important here is payment patterns. Knowing who pays on time, who is likely to delay payments and who pays late will assist you with planning and projections. Knowing this information will also help you to estimate income for any given month and since income is a big part of the cash flow equation it becomes very important to know your customers and their payment patterns.
- Implement a good CRM (Customer Relations Management) system.
A good CRM (Customer Relations Management) system will go a long way in helping you to know your customers. This is probably the subject of a more detailed post in future. For now, suffice it to say – It is an excellent way to document and automate sales, marketing, customer service and all other interaction with your customers. A worthwhile CRM system should be easy to use and secure. Even if your business is small it is still a good idea to get an effective software as such software will always function better than any manual system.
- Set up a system to ensure invoices are sent out early.
Successful businesses know that it is as important to generate income as it is to cover expenses on time. One way to ensure that you are bringing in funds is to send out invoices in a timely manner. This can be difficult to take control of manually so it may be helpful to use an automated system or software that will keep track of invoices and send them to customers on time so you can receive payments on time, before they become overdue.
- Send out regular and early reminders.
In addition to making sure that your customers receive invoices on time, it is also important to send them reminders. All businesses are generally busy and often times some overlook the due dates on invoices. Because of this it is important to send out frequent and early reminders so that payments can be made in full by your customers.
- Create and maintain excellent supplier relationships.
Having an excellent relationship with your suppliers can go a long way in enhancing your cash flow management. There may be instances where you encounter financial challenges and may need some leeway, whether with a delayed payment or some other concession. A healthy working relationship with your suppliers ensures that you will be able to take ask for such concessions when the need arises.
At the end of the day, in business as in life, knowledge is power. Understanding and managing cash flow in your business is one of the surest ways to ensure that your business stays around for the long haul. You must take an interest in the spending – know how much is being spent on what, when it is being spent and why. One of the greatest advantages of knowing is the ability to make changes toward improvement where these are necessary.
Ultimately the goal is always to increase the flow of cash by ensuring that income exceeds expenses and that bills are paid out on time while payments are also received on time. In some ways it is a balancing act but once it is done effectively using the steps outlined above, your business will reap the benefits, become profitable, and stay viable for a long time.
Question: Has your business encountered any cashflow challenges? It would great if you could share how you overcame them in the comments section below.
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