12 Critical Steps For Effective Cash Flow Management

How To Ensure Your Business Remains In Liquid Condition

Managing your business' cash flow is critical to sustaining the business in operation. If your business becomes cash-strapped, you may be forced into distressed borrowing which may be difficult to obtain or will prove very expensive. If cash flow problems are not quickly resolved, a sustained cash crises could spell the death of the business. To help you focus on the critical control points, this article has outlined cash flow control issues which you will only ignore to your own peril.

1. Get a cash flow plan in place. Planning your cash flow provides you a working tool to control cash flow. It also helps you anticipate periodic gaps which you need to manage creatively to keep your business afloat. Potential surpluses will also be highlighted, giving you ample time to decide their optimal utilisation. When actual results are compared with the plan for each period, you get the benefit of knowing if the business is on course or running off target in terms of cash generation and outflows. This will help you take early steps to reposition your business, if you have to.



2. Have an efficient billing system for your business. Customers must be billed promptly and accurately for goods or services they receive. If invoices are mailed or dispatched, it is necessary to confirm, via phone, that they have received by the appropriate officer. An efficient billing system will ensure that billing is strictly in accordance with approved terms and policy and will eliminate abuses.



3. Encourage your customers to pay early, possibly using a cash discount policy as inducement. If demand for your product is very strong however, consider requesting payment in advance of product delivery. If customers are billed, a follow-up process to ensure prompt payment is critical. Otherwise payments will become overdue without reminders or other collection effort. Its important to aim for early payment as this is better for your cash flow. Also, have a plan in place for dealing with defaulting customers as this could become a major avenue to lose money in the business.



4. You need cash collection controls, to minimise losses. Ideally, the person invoicing customers should not be involved in collection of payments. Similarly, recording of sales, cash payments and outstanding accounts should be vested in a separate officer. Where, due to staffing limitations this separation of functions is not feasible, ensure that a review process is implemented and followed. What do you check for? That unpaid accounts are properly captured in the records; that paid transactions agree with cash collections; that collections are banked in tact or treated as you have directed.
   
   
5. When you buy products, ensure you bargain for favourable payment terms by way of longer credit period and higher discounts than you give. If you secure long payment periods, you effectively fund your business from this source. Buy on credit whenever you can, but be sure to pay on due date.



6. Determine what order quantity and frequency is best for your business, as justified by the demand profile. Bulk purchases may earn you lower prices but may result in tying money down for longer that necessary. So, you need a balance. If you can learn a few things about proper stock control, this will likely impact on your cash flow management.



7. Get your payment process under proper control. Indiscriminate and frivolous payments will drain your cash flow and ruin the business. It's fun to spend money, but unbridled spending will destroy the business. Also, be sure that if expenditure can be initiated by any other person besides you, such person is responsible and prudent. The approval and payment process must also be clear and observed.



8. Keep a tab on business expenditure, even when seemingly small figures are involved . They easily accumulate to much. Every spending should be for quantifiable, verifiable and commensurate benefit to the business. You can get some ideas on expenditure control from our article Putting overhead expenditure in check: 20 top strategies you can apply.



9. Delay payments when you can legitimately do so. In doing this, be conscious that your integrity is important for your long term survival in business and must not be diminished. Meet obligations that you must, but when you have the option, you're better off paying later. If the vendor, service provider or (more likely) government agency is not anxious to get paid, why hurry to pay when you can still trade with the money and earn a margin?



10. Don't pay cash when your cheque can be accepted, especially if the amount is significant. You gain some lag from the clearing process which can prove very useful in managing your cash flow. Before the cheque is hitting your account, you would have made sales to fund it. Whatever you do, however, ensure that your cheque is never dishonoured.



11. A sudden cash squeeze can always arise, so get a credit line from your bank if this will help. As costs are involved, you must do your calculations. Processing fees will be charged, but if you haven't drawn on an overdraft line you don't get to pay interest. Also, quickly funding the account after you've drawn on it to meet a shortfall, will ensure that your interest remains low. If failure to meet a sudden payment obligation could prove damaging to your business, a back-up credit line will be priceless.



12. Ensure that excess cash is promptly and judiciously invested. The rainy day will still come, so don't burn off cash you don't immediately need. Put it in an income-generating investment: bank deposit, shares, real estate, etc. The choice will depend on your assessment of the needs that may arise. When the surplus is very temporary, a call deposit in the bank will still earn you interest income, yet leaving the fund readily available when you need it.

Generating money in your business does not guarantee that the cash will be well-managed. Cash management is critical to the business and requires deliberate attention and effort. If you get it right, you're sure to keep the business effectively liquid and able to operate and make more money. Failing to do so may however result in a cash crises which can grind your business to a halt.