Hiccups in Cash Flow are a Business Reality. Follow These Tips to Resolve Them.
Cash management plays an important role in the success of a small business. Even a business that has a good product or service can fall by the wayside due to poor cash management. While growth in sales is something to cheer about, this does not necessarily represent immediate cash earnings. A business can make an accounting profit but still go bankrupt due to the timing of cash inflows and outflows. Setting up a good cash management system should be a priority when starting a business.
Following are some essential elements that business owners should consider when devising an effective cash management system.
1. Operating Cycle of the Business
Based on the type of product or service offered, every business needs to purchase inventories, pay for overheads including employees, and plan for capital investments. A business needs to have an idea of the average time it takes from investing in inventories to the time it takes to make and sell its products and get cash for these sales. A business requires working capital to meet its day-to-day expenses until the receipt of sales proceeds. This is calculated by subtracting current liabilities (payables) of the business from current assets (receivables).
2. Forecast and Budget
A good way to ascertain the requirement for funds is to forecast sales and maintain a budget for planned and expected expenses for the next three to six months on a monthly basis. By comparing these items against actual figures, a business can get a good idea of the timing of its cash inflows and outflows and refine its forecasts and funds requirements. Variances in these figures are opportunities to look at new ways to cut expenses and check for over-estimation in sales.
3. Payment Terms and Inventories
Inventories tie up cash for a business. Depending on the cost of funding working capital, it may make sense to make use of discounts offered by inventory suppliers and pay early. Keeping a tab on the rate of inventory turnover can help spot slow-moving items and also help to prevent over-investing in inventories.
Some contractors take many months to pay for invoiced goods. Although a big contract may look tempting, a fledgling small business should examine the payment terms offered before agreeing to such an offer. Some businesses offer early-payment discounts on large sales contracts to induce faster payment, especially if it results in savings on interest payments on a line of credit. Others request advance payments or a partial deposit on a contract to cover the cost of inventories and other expenses. Invoicing promptly following a sale and following up on late payments should be elements built into the cash management system of the business.
4. Cash Reserve
Despite the best of planning and budgeting, a business can face a crisis when funds are urgently needed on account of slow sales or a machinery breakdown. Rather than have to rush to a bank to negotiate a loan or depend on personal resources, it is better to have some funding in place to meet such situation. In addition to having a cash reserve, consider having an approved line of credit, business credit card or some liquid investment to meet such situation.
5. Leverage Technology
There is a choice of online cash management tools that include invoicing, sales forecasting and budgeting. Computers, mobile devices and point-of-sales systems all help to keep track of sales and inventories. Many banks also offer online payments, email funds transfers and payments in real time. A small business can choose from many options to devise an efficient cash management system. Such a system can not only provide a realistic estimate of its cash flow requirements but also help to reduce the number of employees involved in this function.
The Bottom Line
Effective cash management involves growing sales, curbing expenses, and making prudent choices concerning the purchase of machinery and other capital investments. It also means getting early warning of any liquidity issues so as to take corrective action. An efficiently implemented cash management system enables a business owner to look after these important functions in a timely manner.
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Universal Funding is a nationwide invoice factoring solutions leader, supporting growth-focused businesses with scalable factoring solutions. With its invoice factoring, payroll funding, and purchase order financing services, Universal Funding provides clients with the working capital needed to grow and support their businesses without taking on new debt. Ranked as one of the nation’s top invoice factoring companies, Universal Funding provides cash flow financing for businesses all across the United States.