Part of effective cash management is cash flow (also referred to as liquidity). All businesses need a healthy cash flow to survive – that is, money on hand to keep the business running on a daily basis.
This means having access to money (or being able to convert assets into cash, without a loss of value) to meet unexpected payments or liabilities, maintain regular financial obligations within the business, and buy other assets or grow the business.
Cash management processes
All of these are necessary to deliver better returns to stakeholders and prevent the business from going bankrupt or dissolving into insolvency. To ensure that your business manages its money effectively and has enough cash flow to service its needs, you need to be fully aware of your business’ financial situation at all times.
This will prevent you from running into unexpected expenses arising before you’ve been paid and are able to make a payment in turn. Make financial management a central part of the daily management of the business. This might require a dedicated financial team and regular meetings in which finances are discussed with relevant stakeholders.
Budget for cash flow requirements and revisit that budget on a regular basis so you know exactly how much money is needed and when. Remember to consider the times of year when more money is needed and to build in a safety net for unexpected expenses.
Keep the business running with cash flow
Employ a reputable accountant or bookkeeping firm to keep accurate records and ensure legal and regulatory compliance. Let debt collection be a key focus by making it an important part of someone’s daily work so that clients are reminded consistently and firmly that outstanding invoices must be paid. No payment equals no cash flow.
Ensure that cash flow is a key consideration when planning supplier payment and client invoicing methods and times. Spend time thinking about your payment terms – are you too generous with your clients? Can you really afford to have them pay you on a 30 or 60 day basis when Cash On Delivery (COD) is actually what you need? Watch your expenses.
Just because there’s money coming in, doesn’t mean it should be spent all at once and on the most expensive items. Says Entrepreneur Magazine in How to Better Manage Your Cash Flow:
“Don’t be lulled into complacency by simply expanding sales. Any time and any place you see expenses growing faster than sales, examine costs carefully to find places to cut or control them.”
Meeting your financial obligations
Check your stock. If you sell products, consider which items are selling and which are just sitting on the shelf but keep getting ordered every month. Stop stocking the products that don’t sell, as holding stock locks your cash away, impacting negatively on your cash flow.
Manage your credit wisely. Credit cards and overdrafts can help your business through a difficult situation but it’s important to remember that credit is never a long-term solution as it brings its own cash flow concerns and can do more damage than good if not managed properly.
All businesses, including family businesses, need systems in place to ensure financial success. From managing your relationships with your suppliers and clients, to the way you manage daily accounts, effective cash management will help your business to survive and grow.