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Managing Cash Flow: Effective Strategies for Companies

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For small businesses, cash shortages can be severe. Every year, a lack of cash forces many small businesses to close. Even a short-term cash flow problem can make it difficult to pay salaries, rent, or buy supplies.

There are many causes of cash flow problems. Falling sales, seasonality, one-time costs, and late paying customers. Late payments in particular affect many small businesses, making it even harder for them to survive let alone grow. To help you avoid falling into these situations, here are some best practices for managing cash flow and growing your business.

Get a “360 degree overview” of your cash flow

One of the first things you need to do is understand the big picture of your financial situation. To do this, you will need a cash flow statement and a cash flow forecast. A cash flow statement, like a bank statement, gives you a historical picture of your cash position at any point in time and is usually prepared at the end of each month. This is a snapshot of the cash that has flowed into your business (profits, grants, etc.) and has been spent (invoices, payroll, inventory costs, debt, etc.).

On the other hand, your cash forecast is for the next month, quarter, or even year. It’s an invaluable tool to help you anticipate problems before they arise so you can take the appropriate measures to mitigate them. Use cash flow statement data like typical customer payment terms, revenue projections, inventory purchasing plans, and other expenses to make your predictions. Most accounting software includes cash flow statements and forecasting reports that can be generated based on accounting entries.

Help your customers pay you faster

Unpaid invoices are an important cash flow factor. Studies show that the cost of unpaid small business bills is a big deal. But you can take control and bridge the gap between invoicing and payment. Here are some ideas:

  • Pay on time – Don’t delay making payments towards the end of the month, as this will slow down the time it takes for the money to be paid into your bank account. Instead, charge it as soon as you complete the transaction. If it’s a large or ongoing project, set up monthly payments or even use milestone billing so you can bill when major project phases are completed and get paid fast.
  • Find out how your customers want to pay – Many large companies use direct deposit or pay through automated payment systems. Find out what your customers are using and make sure you’ve secured the right payment method. This will minimize problems with late payments due to technical difficulties.
  • Research your invoice design – We’re not talking flashy graphics, but the clarity, clarity and content of your invoice is what matters. Include important contact information, available payment methods (with relevant links where possible), payment terms (as agreed in your contract), user-friendly fonts use, etc.
  • Use an invoicing tool – There are many free invoicing tools on the market that can help you invoicing and therefore getting paid faster. These are computer applications that make it easy to create invoices, track payments, issue automated reminders, and integrate payments into accounting systems.

Maintain cash safety stock

One way to deal with a cash flow problem is to keep a cash buffer in a bank account. This is not always easy, especially if you are worried that you will not have enough cash for immediate disposal. Most financial analysts recommend that individuals and business owners have sufficient cash reserves of 3-6 months to cover their expenses. This depends on the level of your personal financial situation. Try to start with small cash contributions to the savings account that you build up over time, and use your cash flow projections to inform your savings plan.

Another source of cash reserve is a bank line of credit. Unlike traditional loans, a line of credit gives you more flexibility because it can be used when you need it — for example, to finance hiring and procurement, or to use as a safety net when you’re facing cash-strapped times. Make sure you apply for the loan during a financially healthy period, then when you need cash, borrow against it and pay it back when you no longer need it.

Be strategic about your growth

Rapid growth can often lead to cash flow problems. For example, winning a new contract can mean investing in new employees. However, if the payment period is 30, 60 or even 90 days, it can lead to a liquidity crunch on payday.

Don’t be afraid of growth opportunities, but use your cash flow forecast to figure out how long it will take you to pay off the debt you’ve been forced to take on as a result of growth (remember, lines of credit can also be useful at this stage). Think of every customer as an investment and ask: Are you profitable and how long will it take to make a profit?

Build a relationship with your payment processor

Knowing the name and email address of your customer officer who issues your check or money order is a big plus. Most B2B relationships involve sales, marketing, or HR other than accounting. But if you can know which employee is responsible for accounts payable, you will be in a better position to get answers on the status of your payments and act immediately if there are delays. 

Be careful with outstanding invoices

Create a system to track which invoices are open, or better yet, which are nearing their payment due date, so you can follow up on expected payments as soon as possible. Depending on the number of your customers, an excel spreadsheet is an effective tool to start with, but things become much easier when you use computerized accounting.

You will agree that cash flow is the key to the success of a business and  a paystub generator can help you to track all types of incomes in one place. “Cash is king.” If you have them, you can run and grow your business smoothly and take advantage of the opportunities being deleted. If you don’t have enough cash, it will be a struggle, and you will have to find ways to manage the liquidity of the business in the ways mentioned above and others that you will devise.