How effectively are you managing cash flow?

Cash flow is a key indicator of a business’ financial health. Knowing how to maintain a healthy cash flow is essential to being a successful business. It can help decrease the required capital and it can increase profitability by reducing interest expenses. It can also help to generate income on surplus funds. 

Properly managing cash flow is a matter of both good overall planning and effective use of cash flow strategies. 

Owners of well managed SMEs should consider the relevance of each of these strategies in the context of their own business. Not all strategies will be suitable for all businesses but the strategies may help you to clarify why, or why not, a particular strategy might be useful.

 CASH FLOW CHECKLIST

SUPPLIERS

 

* Negotiate extended credit from suppliers. * Make prompt payments only when worthwhile discounts apply.* Maintain good business relationship with all suppliers.

* Talk to suppliers about mutually beneficial arrangements. e.g Joint promotion & Marketing to save expenditure.

SALES

 

* Sell for cash or credit card rather than on terms if your industry permits.* Increase sales (particularly those involving cash payments)* Increase prices, especially to slow payers.

* Seek deposits or  multiple stage payments.

* Add late payment charges or fees where possible.

* Review the payment performances of customers – involve your sales force – consider not dealing with bad payers.

COSTS

* Reduce direct and indirect costs and overhead expenses.* Periodically review what you are paying for service contracts, such as office cleaning, phone plan charges, your bank services etc.* Don’t let policies automatically review – review them first.

ACCOUNT HANDLING

* Invoice as soon as work completed – don’t wait till the end of the month!* Age accounts receivable monthly.* Consider shorter payment terms.

* Add late charges and fees when possible.

* Tighten customer credit requirements.

* Reduce the amount of credit given to customers.

* Use credit cards to make business purchases (as long as they are paid on time this can be an effective from of credit).

CASH HANDLING

* Deposit payments promptly.* Make your cash work for you – invest excess balance into interest bearing account.

INVENTORY

 

* Get rid of slow moving items (sell at cost or bundle and discount etc).* Improve control over work-in-progress .* Check inventory turnover rate against other business in the industry.

* Reduce your inventory to most necessary items.

* Assess your ideal inventory level based on historical sales patterns and on projected future sales and safety stock requirements.

ASSETS

 

* Assess lease versus purchase options.* Identify and sell off surplus assets.* Convert Debt into equity.

* Defer capital expenditure that won’t achieve acceptable cash paybacks in a given period.

FINANCING

* Consider prudent borrowing.* Raise additional equity funding.* Defer dividend payments.

TRADING PATTERN

 

* Investigate marketing to encourage ‘out of season’ buying.* Vary prices by season.* Encourage non-urgent customers to wait for delivery until slower time of year.

MANAGING CASH FLOW

* Develop medium and short term cash flow forecasts and update them regularly.

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