Business operations are critically dependent on the positive movement of cash. Unfortunately, you can’t always pay your bills from sales and profits.
As a business owner, you need to become the master of your company’s cash flow. You also need to control costs and set up a good collection system for your accounts receivable. Additionally, you need some solid payment schemes for accounts payable. Your inventory can tie you down tremendously, so it’s good to stay on top of it with inventory management software.
Cash flow isn’t the simplest thing to manage, but here are some tips to help you.
Work out your cash conversion cycle to start keeping your cash flow under control. The cash conversion cycle is the time it takes for resources you put into inventory, production, and sales efforts to turn back into usable cash.
The cycle starts when you sell merchandise to customers and purchase inventory for your company; it ends when you have received payments from customers and when you have paid for the goods you bought on credit. Relying too much on your trade credit and business credit cards can become problematic, so to take the right steps toward speeding up your cash conversion cycle, you need to figure out how long your individual company’s cycle takes.
Establish accounts receivable guidelines that will ensure you always have enough money coming in from customers. You can conduct a thorough background check on a customer’s credit record before you allow them to do business with you.
Additionally, you can impose a fee on customers who pay their bills late. This will be an incentive for them to pay on time in the future. Create an aging report of your accounts receivable to help you pinpoint “problem” customers. You are then able to send those customers notifications about what they owe you.
If you want to get the most out of your money, do business with suppliers who allow the longest payment terms at zero interest. The idea is to defer cash outflows as much as possible without sacrificing your credit standing. One way of doing away with the need to send money out days before bills are due is to arrange an electronic funds transfer (EFT) system with your bank. With an EFT, you can make payments the day they are due.
Knowing which of your products are fast, slow, or non-moving will help you decide which items to continue to carry and how much of certain products you need to retain for selling. It is also a good idea to know how much of a profit you are making from certain products. Inventory management software can help you with this. It is important to free up as much cash from your inventory as reasonably possible without affecting sales or production performance.
Mastering your cash flow is one of the most important facets of running your business. So, get to know your company’s specifics and be mindful of your accounts receivable, accounts payable, inventory, and cash conversion cycle.
