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Manage Your Cash Flow with These 5 Steps
A cash flow projection can act like an early warning system for any period. A leading cause of business failure is a lack of cash flow management, but by taking some simple steps in managing it, you will find it can improve your business outcome.
Cash is king is a common expression in business. Surprisingly though, few owners or managers take the steps needed to manage their cash flow. By ignoring it, they will sometimes find an empty bank account and nothing to pay their bills with.
Controlling your cash flow helps prepare you for slow periods and plan for needed financing. Peace of mind is also a by-product of proper planning.
These five steps will help you get a better handle on your cash flow.
First, make sure your business is earning a reasonable profit. Even good management won’t help without strong fundamentals.
Take the time to review each of your products and services separately and assess if they are making a positive contribution to your bottom line. Products must be priced appropriately so strive to eliminate inefficient items that do not contribute to profitable sales.
It may be necessary to raise prices to more accurately reflect costs and dump lower-margin product lines. This helps you stay ahead of the curve in cash flow management.
Do a cash flow projection
Prepare your cash flow projection for the coming fiscal year. Remember, this will act as your early warning system for cash flow interruptions. An Excel spreadsheet is a simple way to plot with or use your accounting software to forecast expected monthly cash in and out. You should include big-ticket items you are planning to purchase.
The projection will show slow periods so you can plan what to do at that time. Check your actual position once per week or month against your projection. You will quickly be able to deal with any divergence.
Finance large purchases
A common mistake is to use cash to buy a long-term asset, instead of financing it. You may have a lot of cash on hand at the moment, however, you may end up short if you experience an unexpected revenue shortage or rapid growth.
Bankers may be guarded in lending if your situation is a crisis. Using a cash flow projection you can better plan financing needs ahead of time.
Speed up cash inflow
Collecting cash more quickly can save interest costs on your line of credit. Send out invoices immediately after the transaction is complete. Ask customers to pay electronically to save the time to receive, deposit clear a cheque. Charge interest to those who take too long to pay you.
Raise cash quickly in a crunch
If you are experiencing an unexpected cash flow crunch, you can raise cash quickly using various techniques:
- approach your bank for assistance
- consider selling inventory and assets at a discount
- ask suppliers for extended terms
- offer customers a discount to generate quick sales
If you need assistance in preparing a cash flow projection, reach out to our office for assistance on this, and any other matter involving the smooth operation of your business.
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