5 Essential Steps to Stronger Cash Flow Management

5 Essential Steps to Stronger Cash Flow Management 800 600 Pauleen Miller

Watching businesses deal with current business conditions reveals that some businesses are struggling for survival while others are going gangbusters. Companies at both extremes share one priority: carefully manage your cash.

Here are recommendations to help you avoid risk and make the most of your cash resources.

1. Finance Processes Matter

That may seem obvious, but some organizations still miss billing clients for orders and have erratic cash or accounts receivable collection policies. A small investment of time in reviewing current processes can lead to improved procedures that minimize errors and increase consistency. Automation technology is another sensible investment to help you invoice faster, manage multiple currencies, allow various payment options, minimize debtor delays, and closely track accounts receivable. It’s best to get a handle on your business processes and unique needs before investing in technology.

 2Profit ≠ Cash Flow

It may seem odd, but net profit doesn’t equal positive cash flow. Unfortunately, there’s no direct correlation between the two. Businesses can have extended periods of profitability where revenue exceeds expenses and tax, but they can still be short of cash. That’s the bad news. The good news is that these ‘gaps’ in cash are predictable, especially where the business has been around for some time or has accurate forecasts. More good news is that there are ways to reduce the gap by minimizing or delaying outgoing cash and increasing or speeding up incoming cash.

There’s even more good news: once these dynamics are understood, sound policies can be implemented, and management can generally focus on other things, like increasing sales.

3. Increased Sales should PRECEDE Increasing Expenses

Don’t count your chickens before they hatch, right? When a business experiences revenue growth, something is probably going right. You understand your customers and what they value. You’re offering products that meet their needs and offering them at a sensible price. You’re operating the business in a way that customers can access and enjoy your products. In this case, you may want to invest more to accelerate the growth or expand the business.

Sometimes management decides to ‘take a bet’ and grow expenses before you’ve validated your business proposition in the market. That’s fine, but this isn’t growth. It’s an investment, which requires cash, and it’s based on the hope that your business analysis is robust and you’ll realize positive returns. In many cases, these returns won’t be realized without a solid plan.

Back to cash. As one of your most precious resources, you don’t want to risk available cash reserves lightly. A better way is to generate cash through sales AND THEN invest in growth. Make customer acquisition your focus.

4. “Neither a Lender nor a Borrower be…”

Where possible, avoid taking on debt. There are exceptions when the low ‘cost of capital’ justifies using external funds to create business value. But don’t make this a habit and analyze the options carefully.

Likewise, deny credit. This can become a habit with ‘standard credit terms’ common in some industries. “But all my competitors offer credit terms,” you say. Consider being the first and analyze carefully what will happen. If you absolutely need to offer credit terms, develop credit policies such as:

  • Reference checks
  • Third-party reports
  • Asking clients if they can really pay your bills on time? Don’t assume
  • Viewing a client’s financial statements
  • Asking for payment upfront (even if it’s a small percentage of the total value)
  • Research via the Internet
  • Consider offering a small discount for immediate payment

5. Discounting isn’t a long-term solution

Discounting can be an intelligent business strategy but NOT to fill a cash-flow gap. A glut of new clients may be attractive, but you need to pay the bills to provide your products or services sooner than later. If you already have a good set of products, clients will probably continue buying them even at the list price, so offering a discount leaves good money on the table.

A better strategy may be to offer discounts for clients when they pay upfront or when they choose to pay you monthly (or early).

Conclusion

Cash flow is the bedrock of every business. Develop attention to detail around cash and a set of policies and processes (and automation) to ensure stellar cash management. Cash isn’t a nice-to-have but, for many businesses, it’s a matter of survival. It’s important that you receive the reports and information you need to manage your cash proactively.