Your business should ideally increase revenue and profit every year. It’s easy to become complacent when you start achieving these objectives. However, even profitable and seemingly well-run companies can experience cash flow problems if they don’t handle other aspects efficiently. Implementing cash flow management techniques helps you avoid long-term problems such as excess inventory, negligible cash reserves, and expensive debt.
What is cash flow management?
It refers to the process of monitoring the flow of cash into and out of your business. It helps you determine how much you’ll have to cover future costs such as salaries, debt payments, and utilities. You can also spot business trends and prepare accordingly for the future. A positive cash flow means you have reserves that you can reinvest into your business, strengthen daily operations, or finance acquisitions. Proper cash flow management should, therefore, result in a positive cash flow.
7 valuable cash flow management tips for business owners
The following solutions will help you achieve a positive cash flow position:
Encourage faster invoice settlement
You’re more likely to receive fast payments if you send out invoices immediately. Ensure they’re easy to understand, with clear terms, and the due date indicated in bold if possible. The invoice should also show your preferred payment methods, including instructions on how to conduct them. Remember to inform your clients if you charge fees for late payment. Another way to speed up payments is to offer discounts if they settle the bill before the due date.
A price increase finances day-to-day operations, inventory management, equipment maintenance, and marketing. It’s a suitable cash flow management strategy especially if you’re struggling to meet rising demand. A higher profit margin helps you achieve profitability while maintaining high product standards. It’s not advisable to implement arbitrary price hikes without conducting market research.
Consider your competitors’ pricing, the cost of ingredients, and manpower needs among other factors. With proper marketing, your brand can be the most expensive in its segment and still attract high demand. That’s because most consumers equate a high price with high quality. If you choose this route, ensure you give your consumers value for their money.
Lease instead of buying
Although leasing is more expensive than buying, it’s a better option for cash flow purposes. Instead of committing precious resources to buy expensive machines, you can make manageable monthly payments to a lessor and invest the rest in more important activities. You also don’t have to deal with old and depreciating assets because you can always lease the latest equipment. Additionally, you can benefit from tax incentives since lease payments are categorized as a business expense.
Review your operating expenses
Reigning in daily operating costs is a key factor in cash flow management. Ask yourself if all these expenses are necessary and whether there are cheaper but efficient alternatives. Streamline your operations by using more efficient machines, training workers to improve productivity, and promise incentives if they meet targets. Manage your inventory by getting rid of deadstock, even if it means selling it at a discount. You can use the money you receive to stock fast-moving products or expand to new markets. You’ll also reduce the amount you spend on the storage of slow-moving inventory.
Improve your relationship with vendors
If your vendor gives discounts for early payment, you’ll save money by taking the offer. If they don’t, it’s advisable to keep paying whenever it makes sense for your business. Another cash flow management technique is to negotiate better rates with suppliers. A good example is a discount for bulk inventory purchase. Chances are they’ll agree especially if you’ve had a long and fruitful partnership. Some will offer this incentive if you agree to pay faster, so it pays to have top-notch negotiation skills.
Expand your market
Other than price hikes, you can improve your cash flow by increasing sales. This is possible through aggressive marketing that will open new markets and result in higher revenue. Other strategies are:
- Adding new product lines or services.
- Encouraging customers to buy more via bundled offers.
- Creating a referral program, which rewards your loyal customers and improves sales at the same time.
Most of these tips are relatively easy to implement if you already have a reliable supply chain. The marketing of new products can always benefit from an established distribution network.
Consider a business loan
Although you might have concerns about loans, they’re also beneficial from a cash flow management perspective. You can use the money to expand your business, launch a new profitable venture, buy inventory, purchase new equipment, and settle unforeseen expenses. These advantages could outweigh the small installments your creditor will expect every month. Other than a short-term loan, you can opt for a line of credit.
This financial product allows you to borrow a certain maximum amount for business uses. It’s convenient because you only withdraw the funds that you need, and only pay interest on the money you spend.
These cash flow management tips work for small, medium, and large businesses. A positive cash flow gives a true picture of an efficiently-run company. It also helps you manage other aspects such as marketing, inventory, customer acquisition, and production. If your cash inflows are consistenly higher than outflows, it means you’re not only meeting your business objectives but also securing long-term growth.