Maintaining positive cash flow is vital to the wellbeing of any company. Maintaining accurate accounting requires discipline to keep books updated and avoid unanticipated expenses such as tax payments and debt repayments.
Proactive measures such as negotiating payment terms with customers and shortening the cash conversion cycle are key elements of effective cash management for small businesses. Here are six strategies proven effective by many small enterprises.
1. Look for Opportunities to Invest
Cash flow management strategies require businesses to approach expenses with an investment mindset. Any new spending should be evaluated against specific goals such as increasing revenue or decreasing costs.
If customers are taking too long to pay, investing in credit control measures like offering early payment discounts might help them get paid quicker. Leasing rather than purchasing business equipment may also free up cash while still giving access to modern features that enhance goods and services provided.
Establishing clear spend visibility across your entire organization is also essential, which can be achieved with automated processes that capture and categorise data. A centralised cloud repository with role-appropriate access provides everyone with awareness of cash flow management efforts in your organisation, encouraging them to support it.
2. Control Your Expenses
One effective strategy to increase cash flow in your business is reducing expenses. While this may seem daunting at first, cutting costs and optimizing spending regularly can help your company save both money and resources.
Business expenses fall into two distinct categories: overhead and operating. Overhead expenses refer to ongoing fees that must be paid regardless of production or sales volume, such as rent, insurance premiums and accounting salaries; operating expenses on the other hand vary based on production or sales volume.
Cutting costs is key when looking to increase profitability, manage cash flow issues or implement a growth plan. By cutting expenses efficiently and finding cost-cutting methods without impacting productivity negatively.
3. Negotiate With Vendors
As a business owner, you should carefully monitor both your profits and cash flow. This involves tracking money coming in (sales or borrowing funds) as well as going out for expenses like inventory, payroll, rent and supplies.
When it comes to negotiations with vendors, it’s essential to recognize that not all proposals are non-negotiable. Before entering negotiations with vendors, it would be beneficial to create an impact matrix outlining your desired outcomes and major concerns; this will allow you to determine what topics deserve attention in your discussions while leaving others for later discussion.
As vendors appreciate dependable customers, it’s wise to demonstrate yours during negotiations. For instance, if purchasing raw materials that will take several days or weeks to turn into sellable products, ask your vendor for an extended payment term so that payments can be made when sales increase.
4. Clear Out Your Inventory
Businesses with excess inventory waste valuable funds that could be better utilized elsewhere. To recapitalize, it’s essential that they liquidate this stock quickly in order to sell at a loss and get their cash back quickly.
Offering early payment discounts is another effective way of speeding up cash flows and negotiating better terms with vendors.
Forecasting future cash flow needs and ensuring there is sufficient cash in the bank for expenses and growth initiatives can be achieved through analysis of spend data, optimizing debt/credit arrangements and adopting timely revenue recognition practices.
These strategies can ensure your business has enough liquid cash to pay its debt and operational expenses without needing costly loans or lines of credit. Profits might look good on paper, but profits mean nothing if there’s not enough liquid cash available.