Improve your business cash flow management

Cash flow: the lifeblood of your business

Cash flow is the movement of money into and out of a business. It's a good measure of a company's financial health or liquidity. Managed well, it supports business success; if mishandled, it can jeopardize your company’s future.

While the concept of cash flow is straight forward, executing an effective cash flow management strategy can be difficult. Every business faces its own unique challenges, but cash is essential to cover operating expenses, including purchase of assets and inventory in some businesses.

If your plans and projections aren’t accurate, a cash shortage can place serious stress on your business operations. As a quick reminder, here are some of the basics for  managing your business cash flow.

Profit doesn't equal cash flow

It may sound counterintuitive, but even a profitable business can have a cash flow problem. After-tax profit equals revenues minus expenses and taxes. On paper, this can show a profitable enterprise.

But if expenses come due before revenues are collected, it’s hard to cover salaries, rent and other bills without having cash on hand. Sales may be strong and the profit margin substantial, yet there can still be a cash flow issue if revenue is tied up in receivables.

What affects cash flow? The four areas of a business that most impact cash flow are:

• Accounts receivable
• Inventory
• Accounts payable
• Credit

Here are four ideas to help manage these areas of your operations.

1. Collect receivables as soon as possible

Receivables are the primary source of incoming cash for many companies, and as such, must be well managed. To help turn receivables into cash and align cash outlays with inputs:

• Invoice clients promptly. The less time between the sale and the invoice, the sooner you will be paid. Contracts should outline payment terms agreed to by both parties.
• When client credit is questionable, or a client is new, obtain a bank confirmation or credit check. You can also ask for cash in advance.
• Review aging reports regularly and have your collection department (even it that’s you!) make scheduled calls. Don't procrastinate with delinquent accounts and ensure open communication with clients to find solutions.
• For clients with a track record of slow payment, shift them to pay in advance on future purchases.
• For older accounts receivable, speak with your legal advisors or hire a collections firm.

2. Managing accounts payable

Understanding and using your payment terms effectively is a key cash flow management tool:

• Negotiate terms to meet your needs.
• Ask creditors for extended payment periods when needed.
• Only pay when payment is due – don’t pay early.

Maintaining working capital, and minimizing down payments and monthly payments when purchasing larger assets and equipment are also important considerations. Work with your lender to structure payments so they meet your needs.

Down payments are typically substantial when it comes to purchasing equipment and that ties up cash. Leasing can work in your favour since you can finance up to 100% of the asset and in most cases, payment terms can be negotiated.

Keeping your cash and credit available to manage inventory and other revenue-generating sources is also a good strategy.

3. Streamlining inventory

Inventory can drain cash, though there is a fine line between buying too much and not having enough to meet demand. The more items you need to have on hand, the more likely inventory will impact your cash reserves. To help in this area, you can:

• Analyze trends in your inventory, establish forecasts, and purchase inventory around these patterns.
• Enact "just in time delivery" and buy inventory as close to the sale date as possible. In some cases, this might mean the product sold is "made to order."
• Avoid "dead inventory" by selling off older inventory at a markdown before it becomes outdated. For some businesses outdated may be only three to six months old.
• Increase your inventory turnover rate. Buying more because it is cheaper may mean cash is tied-up in low turnover items. Paying a bit more for inventory but buying less, can be more efficient.
• Negotiate better (and longer) payment terms with your suppliers and ensure you are getting the best combination of price and terms.
• Arrange for drop-shipment if possible on lower demand products (where the manufacturer or distributor ships directly to your customers).

Companies experiencing high growth often have to increase inventory that is sold on credit. Cash injection by investors or special financing may be necessary.

4. Establish sources of credit

Most businesses run into cash flow problems at some point and having sources of credit is essential. For smaller purchases, business credit cards do the trick, although just like personal cards, it's important to pay them off every month to avoid interest charges building up.

For larger expenses such as salaries or premises rental, establishing a line of credit can help your company survive those short periods when cash is scarce. It's important to remember that borrowing when there is a cash flow problem can be more difficult than borrowing when your finances are strong.

It's always best to plan ahead even if it means paying a stand-by fee to keep an unutilized line of credit available.

There's value in business advice

Establishing a relationship with a business advisor at your financial institution can be extremely beneficial when it comes to cash flow management. Expert advice can prepare you for future challenges and greatly ease your road to success.