In the current climate, every business needs cash. If your cash is tied up in accounts receivable and inventory, you are putting the health of your business at risk. Learning about your business’ cash-flow cycle will enable you to maximize new opportunities and allow for flexibility and growth.
By following these six strategies, you will be able to maintain better financial health for your business.
Know your Cash-Flow Cycle
A cash-flow cycle is specific to your business and reflects the business cycle in which you purchase materials, pay wages, sell your product, collect payments, and pay bills. It is important to reflect on this cycle and identify times of the year when you may run short of cash on hand. Consider times of the year when you are slower yet must maintain minimum staffing. What about when you are busy and have extra staff and inventory, yet payments from customers are not being collected quickly? These scenarios have a significant impact on your cash-flows through the year.
Budget, Budget, Budget
Budgeting your expenses down to the monthly detail will allow you to identify periods of time when your business may struggle with cash-flow. This will allow you to proactively make decisions that will conserve cash or generate more cash. By creating a budget, business owners can plan for many of their expenditures, control the time of the year for major purchases (such as pre-paying for advertising or insurance costs), and limit spending where they would otherwise over-spend (such as entertainment, subscriptions, and advertising)
Schedule Time for Your Finances
Once the budget is complete, it is not very useful to you unless you compare it to your financial statements. Keeping up-to-date bookkeeping records and having them readily available to compare to your budget is important to catch unexpected costs and over-spending. Comparisons to the budget will monitor if you are on track with expected revenues as well. Review of financial data should happen monthly so any deviation from budget is caught in a timely manner before cash-flow is impacted.
Control your Expenses
Reducing unnecessary costs and simply limiting spending where possible is critical to all businesses. When businesses are constantly pressured with new software ideas, advertising ideas, sponsorship requests and wage pressures, it is important to reflect on your budget before committing to spending.
Timely Customer Payments
Many business owners will agree that the rising levels of customer receivables is tying up their cash-flow. Consider limiting the number of customers allowed to pay on account and enforce tight payment policies. Finding ways to make upfront payment easier for customers, timely invoicing to customers, and proactively following up on overdue accounts are ways to help reduce cash tied up in customer receivables.
Monitor your Inventory
Second to receivables, having too much inventory on hand is another culprit of tying up cash. Inventory that sits around has a greater chance of losing value, becoming damaged, stolen, or obsolete. Knowing your minimum amounts of inventory to keep on hand, turning it over quickly and ordering large value inventory for as-needed jobs will help maintain cash is available for use in the business.
A steady cash-flow enables a business to pay its bills on time, prepare for unexpected expenses or a downturn in revenues, and invest in growth opportunities. It also allows for business owners to plan for their retirement. Furthermore, without a healthy cash flow, a business may struggle to pay bills and government remittances on time which results in unnecessary interest and penalties.
For support and advice on your cash-flow and budgeting processes, please reach out to us for trusted advice and personal service.