Importance of managing business Cash-flow

What you need to know:

  • As an entrepreneur it is imperative to frequently measure your business cash flow. You need to prepare cash flow projections for, say, next year, next quarter or even next week. An accurate cash flow projection can alert you to trouble well before it strikes.

Cash flow is nothing but keeping track of the money coming in and out of your growing business. Cash is king when it comes to the financial management of a growing company. The lag between the time you have to pay your suppliers and employees and the time you collect from your customers is the problem, and the solution is cash flow management. At its simplest, cash flow management means delaying outlays of cash as long as possible while encouraging anyone who owes you money to pay it as rapidly as possible.

As an entrepreneur it is imperative to frequently measure your business cash flow. You need to prepare cash flow projections for, say, next year, next quarter or even next week. An accurate cash flow projection can alert you to trouble well before it strikes.

Understand that cash flow plans are not glimpses into the future. They’re educated guesses that balance a number of factors, including your customers’ payment histories, your own thoroughness at identifying upcoming expenditures, and your vendors’ patience.

Watch out for assuming without justification that receivables will continue coming in at the same rate they have recently, that payables can be extended as far as they have in the past, that you have included expenses such as capital improvements, loan interest and principal payments, and that you have accounted for seasonal sales fluctuations. For accurate cash flow projections you must have detailed knowledge of amounts and dates of upcoming cash outlays. You must know when each penny will be spent and on what. Have in hand your projection for every significant outlay. In business projections, cash flow projection counts as one of the most important thing you can do as a successful entrepreneur.

On Cash flow management process improving receivables is imperative. If you got paid for sales the instant you made them, you would never have a cash flow problem.

Regrettably, that doesn’t happen. The basic idea is to improve the speed with which you turn materials and supplies into products, inventory into receivables, and receivables into cash. To ensure this happens, I do advice you to use various but specific techniques like offering discounts to customers who pay their bills rapidly; also by asking customers to make deposit payments at the time orders are taken, etcetera.

Most importantly, you have to watch expenses carefully. Don’t be lulled into complacency by simply expanding sales. Any time you see expenses growing faster than sales, examine costs carefully and cut or control them instantly.

Sooner or later, you will foresee or find yourself in a situation where you lack the cash to pay your bills. Those are shortfalls and as an entrepreneur you need to survive them. Having shortfalls doesn’t mean you’re a failure as a businessperson-you’re a normal entrepreneur who can’t perfectly predict the future. However, there are normal business practices that can help you manage the shortfalls.

Foremost, become aware of the problem as early and as accurately as possible. Banks normally prefer lending to you before you need it, preferably months before. When the reason you are caught short is that you failed to plan, a banker is not going to be very interested in helping you out.

If you assume from the beginning that you will someday be short on cash, you can arrange for a line of credit at your bank. This allows you to borrow money up to a preset limit any time you need it. Since it’s far easier to borrow when you don’t need it, arranging a credit line before you are short is vital.

If bankers won’t help, turn next to your suppliers. These people are more interested in keeping you going than a banker, and they probably know more about your business. You can often get extended terms from suppliers that amount to a hefty, low-cost loan just by asking. That’s especially true if you’ve been a good customer in the past and kept them informed about your financial situation.

Choose the bills you’ll pay carefully. Don’t just pay the smallest ones and let the rest slide. Make payroll first-unpaid employees will soon be ex-employees. Pay crucial suppliers next. Ask the rest if you can skip a payment or make a partial payment.

By Julius Landu Bulili – M.Sc. (Econometrics); CPM, S.A.| Business Coach Email: [email protected] or [email protected]