Critical cash flow management strategies for your small business
Managing cash flow in any business is essential. Without cash flow, a business can hardly ever survive. What does a healthy cash flow look like? And, how do you manage something like this in a trade business?
Cash flow can be defined as the net cash and cash equivalents transferred in and out of a business.
In simple terms: How much many is coming in from jobs, etc? How much money goes out of the business bank account to cover expenses, etc.?
Now, a business can be highly profitable and still run into cash flow problems. Let me give you an example:
Business X has won a very lucrative tender. Works are scheduled to be completed within three months and payment to be received 30 days after completion of works.
Materials are purchased upfront with EOM + 30 days payment terms.
The business owner decides to only run a couple of other small jobs during the same period of time and have all employees work on the project.
After three months, the business bank account is stretched to the limits
What happened?
Invoices and employees’ pays were due before the project even finished
There was hardly any incoming cash as no other works were carried out
Cash was flowing out at a higher rate, without cash flowing in
On paper, business X seems to be highly profitable. However, their cash flow management during the project phase was highly negative and could have caused serious problems.
How to prevent a scenario as outlined above? By implementing cash flow strategies:
Cash flow forecasting:
To predict future cash inflows and outflows, create a cash flow forecast. This will allow to plan expenses and investments better and identify potential cash flow gaps before they occur.
Implementing efficient cash management practices:
To minimize the time required to collect receivables and to maximize the tie needed to pay payables, which aids in cash flow optimization.
Maintaining optimal inventory levels:
Keep appropriate inventory levels to avoid overstocking (ties up cash) or understocking (leads to lost sales). Apply effective inventory management practices.
Effective credit management:
A good credit management system should include credit limits and payment terms for customers and monitoring accounts receivable to ensure prompt payment.
Access to credit facilities:
In an emergency, access to lenders and credit facilities is essential. Establish good relationships.
Efficient expense management:
Carefully monitor and optimize expenses where possible. Eliminate unnecessary expenses, lower costs, and negotiate better supplier terms.
There are multiple ways of managing cash flow in a small business. Strategic planning and periodic reviews are a great start to implement those strategies.
Perfectly Organised NT can assist with a financial review and strategic business planning & management. Find out more!
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