How To Create An Effective Cash Flow Management Strategy?

Are you trying to find the best strategies to help you manage your business cash effectively? If your answer is yes, then you’ve come to the right place. Cash flow is the backbone of any business because without adequate cash flowing into the business, you won’t be able to cater to your daily or monthly expenses.

Also, without a proper cash inflow, you’ll find it difficult to manage your finances and expand your business. With that said, to ensure your business makes profits, your cash inflow should be more than your cash outflow. This means you should get more money coming into your business doors than the money going out to pay for expenses. 

This article has all you need to know about the business cash flow, including what cash flow is, what cash flow management is, and the tips you can implement to manage your cash flow effectively. Read on to get enlightened. 

What Is Cash Flow?

Cash flow is the net amount of cash and cash equivalents coming in and going out of the business. In other words, the cash flow is the amount of money generated or consumed within a specified period.

The cash received by a firm is known as a cash inflow while the cash spent is known as a cash outflow. A good example of a cash inflow is the sales, and that of cash outflow is the expenses. If you want to calculate your net cash flow, take the total of all the money flowing into your business then subtract all the payments. 

What Is Cash Flow Management? 

Cash flow management is the process of monitoring or tracking how money is coming into and going out of the business. In other words, cash flow management is a laid down set of strategies that, when effectively implemented, can help monitor, analyze, and improve the financial status of your business.

Tips For Creating An Effective Cash Flow Management Strategy 

For your business to grow and outshine others in the market, you must manage your cash. Cash management means making the best use of the money you receive, which includes maximizing your revenue while minimizing expenses to help you make more profits. Here are some tips to consider:

1. Factoring

Factoring is when a firm, usually a third-party, buys debts or receivables of another firm at a discounted price. The firm that buys account receivables is known as a factor, and factoring can be the best source of finance, especially for struggling companies. 

The distressed firm sells its bills receivable to a factoring firm at a discount in order to raise funds. Selling account receivables can help your business generate cash immediately rather than waiting for your customers to pay their debts. 

2. Ask Customers To Pay Faster

Asking your credit customer to pay faster is another effective strategy that can help in cash flow management. This can be possible by promising to offer discounts to your customers whenever they take less time to pay than what’s stipulated in the credit terms. 

For instance, you can encourage prompt payment by offering a discount like 3/15, net 30. This means the credit period is 30 days, but if a customer pays within 15 days, they enjoy a discount of 3%. Such a discount encourages customers to pay faster so they can take advantage of your discount offers. This ensures you don’t run out of cash. 

3. Cut Expenses

If you find that you’re not making profits, it might be because your cash outflows are more than your cash inflows. If that’s the case, then you need to cut unnecessary expenses. To help achieve this, you need to arrange all your expenses in order of their priority and eliminate the unnecessary ones.

Also, while other expenses can’t entirely be eliminated, you can consider cutting them. Doing so will help ensure you remain afloat. 

4. Lease Your Equipment And Machinery

While it can be the best idea to buy your equipment, sometimes it’s not viable, especially for small and start-up businesses trying to compete with other giants in the market. That’s where leasing your business equipment comes in.

Leasing of equipment can help provide your business with a short-term solution to a financial burden. Also, by operating with leased equipment, you automatically qualify for tax credits. This means you pay less tax than you could do when working with purchased equipment. 

5. Regulate Your Stock Holding Capacity

Though some stock can easily be converted to cash, others can take too long to sell. This means they hold up your money. It’d be helpful to conduct an inventory check to find out what type of goods are moving slowly and which ones move faster. Doing so will help you manage your inventory. After your analysis, try to get rid of goods that don’t sell more quickly. This ensures you don’t tie up your cash on your stock. 

Takeaway

Cash flow management is a must for any business looking to remain afloat. It ensures you don’t run out of cash throughout the life cycle of your business. At the same time, while there are many strategies you can implement when managing your cash flow, go for the one that best suits your business.

Related Posts

Leave a Reply