In the world of business, the only certainty is change. No one can be sure what the future holds for your market niche. Frequently, product launch expenses end up more than expected, and new revenue streams may take longer to generate and collect. Preparedness for what may happen is the secret to handling the challenges of having enough working capital in the uncertainty of the business.
Ensuring your cash flow never runs out can give you more time to make changes for whatever the future holds. Cash flow helps boost the survivability of the business to pivot when needed.
How To Overcome Cash Flow Problems?
The following cash flow management strategies can help ensure that you have the cash flow needed for solid business funding:
Monitor your cash-flow statement
Too many business owners only focus on the profit and loss statement. But one of the leading reasons companies go out of business is because they run out of cash to pay their bills. Therefore, it’s critical to monitor your cash flow statement monthly. It will show if your business added or lost cash during the month.
Your cash flow statement will also show where your cash got spent during that period. You can also use bank statements by comparing the beginning and ending balances.
Build a cash reserve
If your business shrinks, as a result of losing customers, a new competitor or changing market conditions, it is important to have a reserve to support a cash flow management plan. You can do this by having the bank transfer five to 10 per cent of cash balances to a reserve account. Depending on the historical revenue swings in your business, a cash reserve of three operating months should be enough.
Others suggest building a much larger one. But if sales are cut by 50 per cent, the company has a much larger issue than managing cash flow.
Even with such a significant drop, a three-month operating reserve could last for six months. This can help ensure that no matter what happens, your business is secured.
Get a bank line of credit
If your company has an available bank line of credit, you may want to consider periodically borrowing from it.
Banks don’t want to extend credit to companies that don’t use it. The solution is to borrow and repay the loan within terms — even if the cash flow is not needed immediately.
Business credit cards and the short-term loans that they provide can also be part of a support plan.
Monitor your days’ sales outstanding (DSO)
Your DSO is how long it takes for your customers on average to pay their invoices. The lower this number is, the more cash flow you will have.
When you pay your bills on time, periodically ask if your terms can get extended another week or more. The longer you have to pay these invoices, the more cash you can keep inside the company.
For example, if the average time it takes for customers to pay is 60 days and you can cut it to 30 days, your company’s cash flow will increase by 50 per cent.
One way to cut the DSO is to send invoices on time and follow up to ensure they get paid within terms.
Determine how often your inventory turns
The more product you have in inventory, the more cash flow you have invested. Also, the less time a product stays on your shelf, the less cash is in that inventory.
Most accounting systems will report the aging of inventory. From here, you can figure out how often a product needs to be re-ordered annually.
Ask for longer payment terms every six months
When you pay your vendors on time, you may be more likely to get extended payment terms from that company.
When you pay your bills on time, ask if your terms can get extended another week or more. The longer you have to pay these invoices, the more cash you can keep inside the company.
Challenge your basic business assumptions
In the long run, more profit produces more cash flow. Explore how your company can increase its gross margin. Can it sell to customers at a lower cost?
What parts of the business always make a profit, and how can you leverage it? Which are the most profitable customers?
Explore cutting costs even if revenue hasn’t gone down. The best-growing businesses have robust working capital and cash-flow management system for both good and bad times.