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Cashing-in with the Right Flow

In business, one of the most fundamental elements to manage is your cash. The cash flow position of the business plays a huge factor in the survival of the business entity. Cash flow is a measure of cash coming into the business versus cash going out; it is essentially money available to cover operating expenses including short-term bills and emergency expense obligations, and for reinvestment to perpetuate business growth. As a critical aspect of business operating activities, cash flow is the lifeblood of all businesses. The healthier the cash flow, the better the finances of your business. Poor cash management could end up putting even profitable companies out of business. Your income statement may appear healthy but if you are not managing your cash flow well, profits are worth nothing if cash is not coming in. Without adequate cash on hand, a business may not be able to earn money, run operations smoothly and invest in assets that it needs, such as new equipment and inventory. It may have to look to alternative loans with undesirable interest rates that cost more than a traditional loan to make up for cash shortfalls.

Without a doubt, maintaining a healthy cash flow is one of the major challenges in business. It is not an easy feat, but it can be achieved with good cash flow management. In today’s uncertain economy with ever rising interest rates, effective cash flow management is particularly essential in the financial management of small businesses, as well as, new and growing companies. Many small businesses are having cash flow problems, where they spend more money than they earn, because as a result of their limited financial training, they fail to look at their financial statements carefully until problems become too big to handle. New and growing businesses, also, generally, experience cash flow problems because they have yet to build up the reserves needed to cover receivables owed to them.

If you happen to be on the same boat, struggling to keep afloat in a stormy sea of financial woes, do not despair any further. By adopting prudent business practices and changes that are outlined here, you can improve your cash flow and steer into calm business weather for a smooth sail towards sustainability and growth.

Increase Incoming Revenue by Focusing on Sales. Strive for higher sales by selling more goods or services. Employ the right sales people, provide them with proper training and give them clear, specific sales goals which they are accountable for achieving. You should also enhance profit margins by reasonably increasing selling prices. Generally, customers will not oppose a hike in selling prices if it can be justified through improved products, value-added services and speedier delivery.

Reduce Costs. Cut, cut, cut! One of the ways you can reduce cash outflow is to cut down on your operating costs wherever possible. You should keep a tight watch on your sales force’s expenses by giving them a spending threshold and deduct excess from commissions.

Cash Flow Projections are a Must. Get a clear picture of where your cash flow stand. Foreseeing cash flow needs is half the battle in dealing with cash flow issues. You should prepare cash flow projections for next year, next quarter and, if you're on shaky ground, next week. An accurate cash flow projection can alert you to trouble well before it strikes. Most financial professionals will tell you that projections rank next to business plans and mission statements among things a business must do to plan for the future.

Minimise Bank Balance. Do not keep too much extra money in your bank account; keep only the necessary minimum. Invest the bulk in credible investments with more competitive rates so that you will have a “contingency plan” to fall back on to should you encounter challenging times ahead.

Manage Receivables Well to Improve Cash Flow. You should employ stronger, more efficient debt collection policies in order to decrease the time between sales and when you receive payment. Perform mandatory credit checks on all new credit-basis customers; impose deposit payment for all orders; issue invoices promptly; and follow up immediately if payments are slow in coming. For slow-paying customers, you should institute cash on delivery (c.o.d.) policy. Offer incentives for prompt payment to customers, like discounts or bonus, which will motivate them to pay bills quickly. Ultimately, you must get your products to customers faster if you want to improve your cash flow.

Monitor Expenses. When you are managing a growing company, you have to watch expenses carefully. Don't be lulled into complacency by simply expanding sales. Whenever you see expenses growing faster than sales, examine costs thoroughly to find places to cut or control them. Then, take quick actions before things start to spiral out of control.

Negotiate Terms with Suppliers and Vendors. If your clients are required to pay within 30 days, your terms with your suppliers and vendors should be similar. Make payments more slowly. Take full advantage of creditor payment terms. Always pay within the payment terms and not early. Take advantage of the 30-day grace period. Keeping a good relationship with your suppliers and vendors is essential, in case you ever need to extend payment deadlines. Don't always focus on the lowest price when choosing suppliers. Sometimes more flexible payment terms can improve your cash flow more than a bargain-basement price.

Reconcile Monthly Bank Statements. You should always reconcile your monthly bank statements so that you are on top of your disbursement in order for you to control your cash flow. Do not manage your cash flow using the bank balance. Bank balance and cash balance are two different forms of cash. Rarely will the two ever be the same. And sometimes banks do make mistakes.

Secure Bank Line of Credit in Good Times. You're a normal entrepreneur who can't perfectly predict the future. Sooner or later, you will foresee or find yourself in a situation where you lack the cash to pay your bills. The key to managing cash shortfalls is to become aware of the problem as early and as accurately as possible. Set up a business line of credit with your bank when your business is doing well financially. This allows you to borrow money up to a preset limit any time you need it. Since it's far easier to borrow when you don't need it, arranging a credit line before you are short is vital. When your business falls on hard times and you need money instantly, the bank will be less likely to want to extend credit to your business. By securing the line of credit when times are good, you are providing a safety net for the future when you may need it.

Consider using Factors. These are financial service businesses that can pay you today for receivables you may not otherwise be able to collect on for weeks or months. You will receive less than you would otherwise from your receivables, since factors demand a discount, but you will eliminate the hassle of collecting and be able to fund current operations without borrowing.

Asset Leasing. You may also be able to raise cash by selling and leasing back assets such as machinery, equipment, computers, phone systems and even office furniture. Leasing companies may be willing to perform the transactions. It's not cheap, however, and the downside is that you could lose your assets if you miss lease payments.

Move your Inventory. Monitor your inventory turnover levels to ensure that products are continually moving out. Determine what is selling and what isn't. Discontinue products that are not moving or have become outdated. Talk to the supplier about buying them back or substituting with a different product line, and if all else fails, sell them at a discounted price to generate at least some revenue. Explore the possibility of implementing a "just in time" ordering system that allows you to receive merchandise faster, eliminating the need to carry excess stock.

Continuity Sales. One of the most exceptional ways of controlling and improving cash flow well into the future is by employing continuity sales or services. It is simply a contract to purchase products or services on an instalment basis for a fixed period of time. The best example is a magazine subscription. You get more money upfront and your customers get better deals in the long run in terms of lower rates and convenience.

Start managing your cash flow effectively now! Tackle your cash flow problems, and free yourself from worries so that you are better able to focus on ways to grow your business and to embark on generating higher earnings!

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