Every business is unique and has different goals.
There is no “one-size-fits-all” formula that precisely tells you how to control your cash flow.
However, there are some tried-and-tested strategies to understand your cash flow better so that you can control cash flow.
Check out these strategies below and use some or all of these to control your cash flow.
1. Extend Payables
A payable – or account payable – is created every time the business owes money. For example, this happens when a business purchases services, products, stocks, or supplies. However, it can also refer to debts to creditors.
A purchase or expense might not immediately translate into cash out of business, especially if you bought something that you don’t have to pay in full immediately.
Some examples of payables include:
- Purchase on credit
- Subscription services
- Payments that are due after the services have been received
However, your business will need to pay for these goods or services at some point. And, when it does, cash will flow out of business.
In cash flow management, you deploy strategies that allow you to extend payment dates without being late. This way, you delay cash outflows and hold on to the cash for as long as possible.
Some strategies to extend payables include negotiating deadlines, discounts, and more liberal payment arrangements and timelines.
Build healthy and mutually beneficial relationships with your stakeholders to achieve all this.
Here is what to do to leverage the potential of payables:
- First, pay at the end of your creditor payment term. Set up automated fund transfers to make the payment on the day they are due.
- In case of delays, let your suppliers know why you are delaying the payment so as to maintain their trust.
- Pay early if the vendor gives you sizable discounts for early payment.
- Find suppliers that grant you more flexible payment terms than the existing ones, given that quality, etc, are the same.
When extending payables, your relationship with suppliers is important to build trust and confidence.
The key is never to be late with a payment and keep your communication channels open while holding onto your cash for as long as possible.
2. Collect Receivables As Quickly as Possible
In business, receivables – or accounts receivable – are those debts that customers, debtors, and other stakeholders owe to the company. Receivables derive from goods and services received but not paid for.
No entrepreneur wishes to sell goods and services that are not immediately paid for.
Unfortunately, this sometimes happens, like when you offer installments.
For businesses, retrieving cash from receivables as quickly as possible is one of the best ways to improve their cash flow. More so because dealing with debt in business and chasing your debtors is not always fun.
Here are a few strategies to collect receivables quickly:
- Offer discounts to customers who pay quickly or in full at the moment of purchase.
- Request deposits or down payments when a customer orders to get a percentage of the cash owed immediately.
- Introduce strict collection policies and enforce follow-ups.
Continue tracking your receivables.
This monitoring will help you notice if some of your clients are constantly behind or late with payments. In such a scenario, enforce stricter checks or ask for immediate payments.
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3. Make Precise Cash Flow Projections
That’s why learning how to make projections is vital for business success.
It is easier said than done, though.
Because it is easy to look at previous years’ cash flow statements and see what happened, looking at the future can be challenging.
While projecting cash flow, a business owner considers sales, lead generation, or potential financial scenarios.
Prepare cash flow projections for a whole year.
To do so, you will need to estimate the inflows and outflows of cash for the next 12 months. It is not different from what you would do for sales and income projections.
Cash flow projection is vital for your business because:
- First, it allows you to foresee possible shortfalls.
- Second, it ensures that your business always has the cash to pay your employees and suppliers.
- Third, it helps you pinpoint how long it takes your customers to repay their debts.
When making your cash flow forecast, consider fluctuations related to seasonal and industry-specific factors.
4. Invest Wisely
If you are a new entrepreneur, you are probably excited to get your startup off the ground and see your business grow.
Due to inexperience, it is common for entrepreneurs to invest initial capital into marketing, sales, and lead generation. Often, this is because income, revenue, and fast growth are considered an indicator of success.
But high-risk investments where you are not sure of ROI are not always the best way to grow a business.
Small startups and new businesses should invest in assets, machinery, and talents to increase productivity and make the business more competitive.
Also, retain the necessary funds to cover unexpected costs and expenses when these arise. Some common ones include replacing a valuable employee or repairing a broken piece of equipment.
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5. Know When To Take Out Loans
No one wants to take on debts.
However, sooner or later, most entrepreneurs run into unforeseen circumstances that cause them to take out loans to pay for their business’s running costs.
It is ok if you find yourself in a situation where you have less cash than you need because you can’t always perfectly predict the future.
Here is how you can manage cash shortfalls:
- Become aware of the problem as soon as it arises. Do so through cash flow monitoring and management.
- Go to the bank before you are in desperate need of funds. This will help you back your case and show the lender that you are a careful planner. If you go to a lender in the middle of a cash flow crisis, they might think you have failed to plan and will be wary of offering funds.
- Assume that shortfalls will happen. Get your business ready for these scenarios and arrange for a line of credit when your financial situation is stable.
If a bank doesn’t help you, look for other ways to finance a business.
- Suppliers have an active interest in keeping your business going. Ask them for extended terms and keep hold of your cash to pay more pressing creditors.
- Use a specialized financing company, also known as a factoring company, to pay you immediately for receivables. If you are not likely to see a payment for weeks or months, these companies can help you collect the cash instantly after deducting a small percentage.
- Offer a discount to your best customers to pay immediately. If necessary, explain the situation.
- Go to customers who take longer than 90 days to pay or those who are unlikely to pay you in full and offer them a discount to pay immediately.
Also, understand the alternative sources of financing like equity and debt financing.
Equity and debt financing are solutions to long-term debt that don’t necessarily involve repayments.
To learn more about them, just look up “what is equity financing?” and “what is debt financing?” on the web.
For a more precise analysis of your cash flow, don’t hesitate to contact a cash flow coach or a professional accountant who can tell you more about what happens in your business.