6 Nov 2020, 10:40 — 6 min read
Without money on hand, it’s not possible to pay staff, cover bills, or pay taxes. But the good news is that a strategic approach to strengthening cash flow can help you attain a stronger financial position.
The first step is to have a sound understanding of where you cash flow currently stands and where it is likely to go in the future. Often SMEs aren't prepared for all the costs associated with growing quickly. For instance, increase in sales could mean more employees and a bigger inventory and this impacts cash flow.
A forecast is essentially a cash flow projection. A rolling 12-month forecast is advisable for most companies. When one starts mapping things out systematically, one can predict surges in expenses and accordingly be prepared.
Adopt a digital-first mindset by modernising your payments infrastructure with an invoice software or automating the entire payment collection process. Sales and invoices are essential to a small business, and an automated solution ensures that your invoices are sent out on time. You can save valuable time in collecting dues by having an automated system. This will ensure that clients pay their dues on time, thereby minimising bad debt.
Managing cash flow is as much about getting more cash into your as about reducing the cash going out of your business. Follow these simple tips to reduce operating expenses.
Reduce unnecessary expenses: Carefully analyse your company’s cash flow statement by asking yourself these two questions:
Cut out any expenses that are unnecessary and try to minimize the necessary expenses as much as you can.
Streamline business processes: Ensure that your business is running as efficiently as possible. Focus on reducing time and costs. Analyse all existing business processes and gauge if there is a way to optimise things. It may mean leveraging technology smartly. By using time productively, you can get more done and spend less on salaries.
Buy efficient equipment: Increase your business efficiency by investing in updated technology and equipment. This will help save time and cut back on expenses. This may also lead to increased production which leads to more incoming cash.
Negotiating supplier terms is vital during times of financial disruption. Some key areas include:
Negotiate for bulk inventory rates: Some vendors may offer discounts for buying inventory in bulk. These can definitely minimise costs, so do negotiate the best deals with suppliers.
Extending payment deadlines: Extending payments can help you to hold on to cash longer and boost working capital.
Compare vendor rates against industry benchmarks: You must regularly compare your vendor rates against industry benchmarks to make sure they are still favourable.
You must reassess your supply chain from a cash flow perspective. Lower cost vendors typically ask for larger orders or more money up front to offset their price discount. In times of disruption there is value in working with vendors who may charge a little more per unit but offer better extended payment terms or allow smaller orders. Working with local vendors could also avoid supply chain disruptions in international trade.
Another way to increase cash flow is to find new sources of income. Consider ways to expand your sales market. Here are a few new sales possibilities:
If improving cash flow is a priority, make sure all your team members understand that. Encourage your team to think more about how to maximize cash flow when making decisions. It’s important to closely examine everything from large costs like inventory and raw materials to smaller purchases such as employee purchasing. Empower your teams to search for their own ways to maximise cash flow. Your employees will be motivated by the targets you set for them.
Another option to increase cash flow is to take out a short-term loan. With a short-term loan, the lender gives you a lump sum of money that is paid back in regular installments over a short period of time.
There are several great reasons to take out a cash flow loan:
Share with us your tips for managing and increasing your cash flow to run a more successful business. Richard Branson sums it up aptly when he advises, “Never take your eyes off the cash flow because it’s the lifeblood of business.”
Also read: How to quickly pay off business debt
Image source: shutterstock.com
Posted byGlobalLinker Staff
We are a team of experienced industry professionals committed to sharing our knowledge and skills with small & medium enterprises.
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