Over 90 percent of companies spread throughout Europe, the Middle East, and Africa admit to being somewhat in the dark when it comes to their cash flow. That staggering number shows why so many businesses tend to fail without cash flow management.
It’s important to know that cash flow management isn’t a scary thing, it’s just a normal part of managing your business. Read on to learn more about how you can get started.
1. Think About the Future
Ever feel like you’re financially in the safe zone until, boom, a surprise comes and knocks you right back into the red? That’s because you didn’t take the time to anticipate your future needs.
The best way to avoid having to look for cash when an emergency strikes are to have it set aside for such an occasion. When a business looks good and starts to exceed expectations set some aside for a rainy day. The best way to know how much is by tracking expenses for a month or two and aiming to set aside 3 to 6 months worth.
2. Know Lending Opportunities
If you’re simply not in a place where saving is a possibility, then it’s wise to start establishing a solid relationship with lenders. If you can demonstrate that you have a solid record of paying back it’s a huge help. However, if that’s not an option it may be wise to invest in something that can, later on, be used as collateral.
This could mean anything from inventory to equipment. You can even elect to sell your accounts receivable to a third party through factoring, so you can have more of a hand in negotiating the terms.
3. Make Your Money Work for You
The smartest business owners are those that keep their money working for them. If you keep your cash in interest-earning accounts, you’ll be increasing what you have as long as you are maintaining the minimum balance requirement.
Interest rates for these types of accounts can often be high, so it’s important to familiarize yourself with the terms of the account prior to signing up. You may choose to invest in penalty-free certificates that allow you to take a portion of the funds.
4.Teach Your Customers
The faster you can collect payment from your clients or customers, the better your cash flow will be. Which is why it’s vital to train your customers to pay on time or within a reasonable time frame.
One way of doing this is by stating within a contract that if you are not paid within the allotted time frame collection procedures may be initiated or an escalating fine may be applied. By recognizing the urgency in the payment agreement, customers are much less likely to take advantage.
5. Know Your Break-Even Point
It’s important in business to know your break-even point. This is the amount of income needed to simply keep the doors and maintain a business without collecting any profit on your end. This will help you determine at exactly which point your business becomes profitable.
Once you have a fixed number you can create a steady monthly (or annual) goal. You may also find that there are areas where you can cut back on spending to lower that number if you find your profit point is becoming difficult to reach on a regular basis.
6. Use the Right Technology
While it may seem like a lot to keep track of, the truth is there are a number of web and software solutions to help you easily track your financial status and cash flow.
These programs can be as simple as cloud-based spreadsheets to more complex software used for accounting. Determine your own technology literacy, be honest with yourself about how much time you may have to learn new software and choose the right program for you based on your needs.
7. Work With Vendors
In the same way, it’s important to work with your customers, it’s important to work with your vendors. Vendors are one factor that can easily hurt your profitability, whether it’s in a delayed delivery or a sudden increase in the price of an important product.
Manage these expectations by coming to an agreement that helps both of you. Sticking to an agreed-upon payment cycle in return for fixed pricing is often a happy solution for both parties. Try to aim for a pay cycle of 45 to 60 days so you have time to catch up in case you find yourself in a bind.
8. Shrink Cash Outflow
One of the easiest ways to increase cash inflow is to decrease cash outflow. There are a number of ways to accomplish this goal, it only requires attention to detail. For example, you may be able to fill a job position with a software program or easily integrate it into another role. You can choose to repair equipment, rather than going out to replace it. This is even better if you learn how to repair it yourself!
Don’t upgrade just because you can, try to delay it until necessary, and don’t be afraid to choose used equipment over new.
9. Hire a Professional To Help With Cash Flow Management
If you’re not able to effectively manage your financial situation yourself, the first step is to be totally honest about it. The next step is to speak with someone who can.
Hiring a financial advisor is a great way to have someone in your corner looking out for any financial pitfalls that may arise. Not only can they help you prepare for future emergencies, but they can also assist you in analyzing exactly where you can cut back on expenses.
Taking the Right Steps to Your Future
Knowing what it takes to keep your business financially healthy is vital to its success. While you may try to avoid it, cash flow management is a necessary part of running any growing business.
We recommend doing your homework or finding someone who can help advise you on where you want to be on a month to month basis.