By definition, cash flow refers to the amount of money flowing in and out of the business. The larger the time gap between cash outflow (payments to your supplier, employees, duties etc.) and cash inflow (receipts from your customers), the higher the risk it possesses to the business. These situations persist in every business and to smoothly manage such situations, you need cash flow management.
In simple words, cash flow management largely implies managing the frequency of payments and a whole lot of activities to encourage your customers to pay as fast as possible. Cash flow management involves a process of preparing cash flow statements, monitoring, analysing and optimizing such that business has enough cash cushion to run their business.
In this article 'Tips to Efficient Cash Flow Management’, we are sharing you some of the best ways to manage optimum cash flow in your business.
Here are 6 quick tips to manage your cash flow efficiently.
Faster realisation of accounts receivables
Accounts receivables i.e. bills that are unpaid by your customers are major sources of cash inflow into your business. The longer the time your customer takes to pay the bills, the higher the risk, especially for the small business. Managing accounts receivables efficiently is key and will help you in the faster realization of accounts receivables into cash.
Following are some of the tips to improve your accounts receivables:
- Keep clean track of bill-by-bill accounts receivables so that you don’t miss out on anything.
- Keep an eye on the aging of bills by doing aging analysis and follow-up to closure.
- Identify the customer who has poor payment performance by regularly preparing payment performance analysis.
- Have a credit policy and accept advance deposits for confirmed orders. This will give an extra cash cushion.
- Offer cash discounts to encourage quick payments before the due date
- Mail reminder letters to customers with overdue bills
Take a look at 6 Best Tips to Manage Accounts Receivable efficiently and improve cash flow
Managing payable and optimizing cost
Optimizing the cash outflow will also play a vital role in managing the cash flow efficiently. One of the key outflows of cash is towards your suppliers. Taking full advantage of the credit period and delaying the payment as far as possible within the credit terms will help you to balance the cash outflow and inflow. Considering vendors who offer flexible payment terms and discounts on earlier payments will help here.
On the other side, keeping track of your spending even on little expenses will help you to identify the expenses which you can possibly cut down. Prior identification of spending, budgeting and tracking the actual is the best way to optimize the cost.
Cash blockages in inventories
The amount of cash involved in inventories is not often considered by the business in optimizing the cash flow. Very large cash gets tied up in inventories and if not managed efficiently, you are putting your business at a disadvantage. Holding Inventories more than required ties up excess cash that could have been invested in other areas of business. It also adds up to ad-hoc cost managing excess stock.
Managing sufficient stock to meet the forecasted demand will help in mitigating the risk of cash blockage. Also, increasing the efficiency at which you turn materials and supplies into products, inventory into receivables, and receivables into cash will help.
You need these 5 Inventory Management reports to increase cash flow and save money
Cash flow projection statement
Analyzing the historical pattern of cash inflow and outflow gives some insights about the changes in cash position between the two periods but what is required to manage it efficiently is the cash flow projection statement. A cash flow projection considers the various instance of anticipated inflow and outflow and accordingly projects the net balance available for a given period.
The cash flow projection statement enables businesses to make better financial decisions as it provides information about the anticipated cash flowing in and out of the business. An accurate cash flow projection can alert you to trouble before it strikes.
To prepare an accurate cash flow projection, you need to include all the possible cash inflow such as accounts receivables, interest receivables, etc., and cash outflow such as suppliers’ payments, salaries, rent, advertising etc. along with the dates.
Cash flow planning
Cash flow planning is critical to business growth and it should be part of the overall business plan. Every business, at a given point in time, will have short term and long-term business expenses. Preparing an accurate cash flow plan yearly, quarterly or even monthly will help you to create enough cash flow cushion to meet the planned expenses or investment. This will mitigate the risk of an insufficient cash situation which will impact the continuity of the business.
Using accounting software
We all know cash is the lifeblood of business and only a stable, reliable cash flow can truly exhibit the success of the business and seed further growth. Different processes and operations will have an impact on the outcome of the cash flow. Arriving at decisions considering the different processes will be a difficult task. Using accounting software will be of great help. Here are some of the ways accounting software will help in managing cash flow:
- Provides on-time trend analysis and helps you to make better financial decisions.
- Forecasts the company’s cash situation by automatically generating a cash flow projection statement and enables you to decide on future investments and expenditures.
- Insights on monthly Income and expenses, cash inflow and outflow, etc. are key for planning.
- Setting budget, tracking the actuals and identifying deviations against the planned can be easily managed using accounting software.
- Real-time status of accounts receivables, tracking the pending invoices and aging analysis to track long-pending bills.
