Cash flow. Two words entrepreneurs constantly hear, and words that will be ringing in their ears for years to come.
Cash flow is the lifeblood of any business, and the thinner it gets, the weaker your business becomes.
While negative cash flow is not the end of the world, it shouldn’t be a position you get too comfortable in.
“For any business, a positive cash flow is the target,” says Linda Frier, Partner at Coalesco.
“However, that’s usually a lot easier on paper than it is in practice, especially during periods of economic stagnation, which a lot of businesses have had to unfortunately contend with in recent years.”
The path towards the world of positive cash flow isn’t an easy one, but positive steps can be made with careful cash flow management.
Create a cash flow forecast
The first step in managing your cash flow is to create a detailed cash flow forecast. This will help you anticipate future cash inflows and outflows, allowing you to plan ahead and ultimately make better decisions for the good of your business.
“By forecasting your cash flow, you can identify potential shortfalls in advance and take proactive steps to address them,” mentions Linda. “Regularly updating your forecast ensures that it remains accurate and relevant to your current business situation.”
Keep a close eye on expenses
Look for areas where you can cut costs without compromising the quality of your products or services. This might include renegotiating supplier contracts, reducing unnecessary overheads, or implementing energy-saving measures.
“Every penny saved contributes to improving your cash flow,” Linda adds. “Regularly reviewing your expenses helps you stay on top of your financial health and identify opportunities for cost savings.”
Ensure timely payments
Getting paid on time is vital for maintaining a healthy cash flow. Implement strategies to keep your receivable income on track, such as offering discounts for early payments or requiring deposits for large orders.
“Ensure your invoicing process is efficient and follow up promptly on overdue payments,” says Linda. “Consider using automated invoicing software to streamline this process and reduce the risk of late payments.”
Manage inventory wisely
Holding too much inventory ties up cash that could be used elsewhere in your business. On the other hand, having too little inventory can lead to missed sales opportunities. Finding the right balance is key.
“An inventory management system will do wonders for your capability to track stock levels accurately and avoid overstocking,” suggests Linda. “Regularly review your inventory turnover rates and adjust your purchasing strategy accordingly.”
Keep financing options open
Having access to financing can provide a safety net during periods of cash flow shortages.
Establish relationships with banks and other financial institutions to explore various financing options, such as lines of credit, business loans, or invoice financing.
“Being prepared with financing options can give you peace of mind that cash flow challenges can be addressed quickly and without disruption to your business operations,” says Linda. “It’s better to have these arrangements in place before you actually need them.”
Maintain a cash reserve
Building a cash reserve can provide a cushion during tough times.
Aim to set aside a portion of your profits regularly to create a financial buffer that can be used to cover unexpected expenses or temporary cash flow gaps.
“A healthy cash reserve gives you reassurance and flexibility,” notes Linda. “It’s like having a financial safety net that allows you to focus on growth, rather than just survival. With a solid reserve in place, you can take calculated risks, invest in new ventures, and keep your business on a stable path, even when the market fluctuates.”
Regularly review and adjust
Cash flow management is an ongoing process. Regularly review your cash flow statements and compare them against your forecasts. Adjust your strategies as needed to respond to changing market conditions and business needs.
“Stay vigilant and be willing to adapt,” remarks Linda. “Regular reviews help you stay in control of your cash flow which in turn will help you make the best decisions for your business at any time.”
By implementing these strategies, you can improve your cash flow management and ensure the long-term success of your business.
For personalised advice and support, contact Coalesco today. Our team is here to help you with your business’ cash flow management which will put you on the road to success and sustainability.
