There’s a reason that the phrase “Cash is king” is a motto for so many business owners. Profits without cash can be meaningless, as proved by the number of profitable companies that have filed for bankruptcy. That’s why business cash flow management is so important. Defined most simply as the movement of cash (and liquid cash equivalents) in and out of your business, cash flow essentially boils down to timing. The lag between paying suppliers and employees and collecting from customers is where businesses can get into trouble. While healthy cash flow can create value for a company, poorly managed cash flow can leave business owners scrambling to get more cash on hand. If you’re aiming to drive value and avoid problems, consider these seven strategies for managing cash flow.
1. Regularly measure your cash flow
While you can get a lot of information from analyzing your company’s profit and loss statements, these financial documents may not accurately capture the movement of cash throughout your business operations. That’s why many businesses also generate and review cash flow statements on a regular basis, which allows them to see the cash in their business’s operating, investing and financing activities. Positive cash flow occurs when incoming cash is more than outgoing cash, and negative cash flow happens when the cash coming in is less than the cash going out. With this data, you can also calculate the cash flow ratio, a measure of the number of times your company pays off debt with cash generated within the same time period. Getting familiar with these metrics can help you better understand which areas of your business operations are running smoothly and which require corrective action.
2. Be strategic about paying your bills
One habit that can be a sure-fire way to drain your business’s cash is paying bills all at once or as soon as you receive them. It may benefit your business cash flow to be strategic with the outflow of your cash by spreading out your payments. Be sure to read your creditors’ terms so that you have a clear picture of all your debts. Organize your accounts payable by priority, and map out all your business’s payment deadlines. During this process, you might consider whether your payroll cycle is working with your revenue stream. While wage and hour laws will dictate some of this, you may have some wiggle room to free up more cash to keep on hand for the moments when your business could use it the most.
3. Negotiate payment terms with vendors
Low prices are an attractive quality when you’re deciding which companies to do business with, but you may not want that to be the only factor you consider. Choosing vendors with flexible payment terms can help make the difference between whether or not your business has enough cash on hand. If your current or prospective vendor has a payment plan that’s out of sync with your current business cash flow cycle, reach out to a representative for the company to see if there’s any room to negotiate the terms. Once you start the conversation, you and your vendor may even end up finding a solution that is beneficial to both of your businesses.
4. Collect your receivables more quickly
Staying on top of invoicing can be an effective way to shorten the time between when your business records revenue and when the money hits your business bank accounts. Send invoices as soon as the work is completed or once the goods or services have been received. Consider incentivizing your customers to pay faster by offering a discount for early payments. Follow up promptly on overdue payments, and keep a close eye on customers who regularly pay late. If you have chronic offenders, consider changing that customer’s payment terms to require a deposit or impose a cash-on-delivery policy.
5. Take advantage of credit
Sooner or later, you will likely encounter a situation where your business lacks the cash needed to pay the bills. Even the most seasoned business owners deal with unexpected shortfalls. Knowing this may happen, it’s a good idea to have a plan. That’s where a business credit card or a business line of credit can be a valuable resource. Maintaining access to credit is a smart way to build a “cash cushion” into your business plan.
6. Use technology to make and accept payments
Depending on what kind of business you have, online payment processing is one avenue for speeding up the delivery of cash in your business bank accounts and reconciling outstanding balances for cash output. This should be a consideration when evaluating vendors, but also when determining payment options for your customers. There are several point-of-sale solutions for credit card processing, many of which have developed plans with small businesses in mind. If you have in-person interactions with customers, consider outfitting your employees with smart phones or tablets that support mobile apps for collecting payments on the spot — wherever transactions take place. Doing so can end up being a huge asset if your business works with deliveries or runs a pop-up shop.
7. Look for ways to move inventory
If your business involves working with products, your inventory is essentially the same as cash. Because you can’t collect on that cash until you sell the inventory, you may want to explore tactics for speeding up the sale of sitting inventory. Increasing marketing efforts, encouraging preorders and altering prices — especially discounting old stock — can be effective ways to move products. In this same vein, it may also be worth reassessing your inventory forecasting and restocking strategies to ensure they’re aligning with the reality of your business’s activity.
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For informational/educational purposes only: The views expressed in this article may differ from those of other employees and departments of JPMorgan Chase & Co. Views and strategies described may not be appropriate for everyone and are not intended as specific advice/recommendation for any individual. Information has been obtained from sources believed to be reliable, but JPMorgan Chase & Co. or its affiliates and/or subsidiaries do not warrant its completeness or accuracy. You should carefully consider your needs and objectives before making any decisions and consult the appropriate professional(s). Outlooks and past performance are not guarantees of future results.
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