How to manage your Cash Flow in Your Business

How to manage Cash Flow in Your  Business


It is often said that in any business "cash is king". I am sure that someone reading this article would have come to this realization painfully when you have assets worth millions but don't have enough money to buy fuel to power the generator.

This article aims to give you a working definition of cash flow, show how to prepare a cash flow forecast, increase inflows, how to delay and if possible reduce outflows.

What is the cash flow?

In simple terms, cash flow is the movement of cash in and out of a business. It tells the story of how money is entering and leaving your business.

If more money is entering than is leaving we say you have a positive cash flow. If on the other hand, more money is leaving than is entering we would say you have a negative cash flow. Positive cash flow is the name of the game.

Take note that profit on paper is not the same thing as cash in the business. Profit only becomes valuable when it has been received as cash into the business.

Understanding the movement of cash within your business will help you to avoid failure of the business.

What is a cash flow forecast?

A cash flow forecast is an estimation of your future inflows Vs outflows over a period of time. This can be in the form of a simple excel sheet or via other business management applications.

A typical cash flow forecast will contain:

  • cash in from sales
  • cash in  from other sources 
  • Cash out for purchases
  • cash out for salaries and wages
  • cash out for loan payments
  • other payments

The difference between the sum of the red and the blue above
is your net cash flow per time.

How to improve positive cash flow


The best way is to sell more, make more sales. If you have set a good price point and you are able to increase your sales then your business should have a net positive cash flow

You can also request for milestone payment. Instead of waiting for payment at the completion of the project, you can agree on performance milestones with the client and request for payments as you meet the target.

This practice is commonplace in the construction industry, you may want to explore this option if it is possible to divide your product or service to what I would I refer to as "value portions", i.e when the customer can see value even when the entire project is not yet completed.

Invoice financing is another option worth exploring. You have delivered the job and invoiced the customer for payment, so long as the customer is creditworthy and the bank can verify this, they can pay you immediately instead of waiting for 30,60 etc payment cycle.

Ensure that your business can absolve the cost that the bank would charge for this service.

Leasing or selling ideal equipment or even office space. Do you have space you can lease out for a fee or do you have equipment that can be leased out or sold outrightly?

Open a credit line. Don't wait till you are out of cash before you reach out to either your bank or suppliers to request for a credit line. Negotiate this long before the need arises. Make sure that you have built a reputation ahead otherwise this might be difficult.

How about money leaving the business?


Develop a buying policy. A rule as simple as making sure you have at least 2 or 3 quotes before making a buy decision can make a world of difference in reducing your outflows.

Delay payment for as long as possible. Do you have a credit line of say 30 days from your supplier why make immediate payments? take the advantage.

Let your business be data-driven. Check your cash flow forecast and make provisions for the period of a shortfall in your receivables.

Conclusion

These tips are by no means exhaustive, but they are a good place to start.

Understanding what cash flow is, its importance and how to maintain positive cash flow at all times will surely make your journey to business survival easier.

Do you have specific money management challenges, write them in the comments section below and I would try my best to get answers for you.



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