6 Ways to Improve Cash Flow
Did you know that profitable, growing businesses regularly go bankrupt?
One main reason is cash flow mismanagement. The typical business owner is not formally trained in cash flow management and many are missing this vital skill needed to achieve long term success and stability. The importance of good cash flow management cannot be stressed enough as it is one of the top 3 reasons businesses fail. If you know how to do the math, you are on your way to long term growth and stability. Here are 6 ways to improve your cash flow:
Understand the difference between cash flow and profit – A lot of owners make the fatal mistake of thinking profit and cash flow are the same thing, they are not. These are 2 different symptoms of your company’s financial health. You can make a profit and have cash flow problems. You can have cash flow and not be making a profit. Both are indicators there is a problem in the business.
Build up cash reserves – You will have cash shortfalls, every business does. Cash reserves will help you get through them. How much of a reserve is dependent on a variety of factors. Be realistic about figuring out your requirements, and hard-nosed about not touching the money. It is not a slush fund and should not be used as one.
Negotiate and track receivables – Keep net-60 and net-90 terms to a minimum, and think about offering early payment discounts. Assign someone the job of monitoring receivables, initiating collections and regularly updating you via the cash flow worksheet. At least weekly, although for most businesses daily is best. Do not let customers keep your money in their bank.
Negotiate and track payables – Get the best deal on payables you can for your cash flow. Contracts can often be negotiated to net-60 and net-90 terms. Pay your bills on time – paying late fees is a good indication that your cash management system is not under control.
Keep control of debt – Debt should not “just happen”, you have to manage it. Create a strict, written policy for giving credit and stick to it. Do not over extend, even your best customers will take advantage of a lenient system if allowed to. Credit is not cash until you are paid, until then it is a debt. Remember, you are running a business, not a charity.
Also, keep control over the credit you accrue. Only take on credit you can pay back, not credit you think you can pay back – do the cash flow math and have patience before you take on any debt.
Create and use a cash flow worksheet – This is an important document, one you ought to know by heart. It should tell you, at a glance, your current cash flow situation. Since it is updated and used often the simpler it is the better. There are many worksheet templates available, find one that suits you. If you have an accounting program it will be a part of the package.
Trying to run a business without managing your cash flow is like trying to shoot upstream rapids, alone in a canoe without a paddle or map. You might be able to do it. But, why make it hard, when it can be much easier? There will always be rapids to navigate, but you have a better chance at success if you are going downstream, in a kayak with a paddle and map.
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Andrew Acer, Managing Director
(833) 4MyProfit (833) 469-7763