What are the most critical aspects of running a business? Let’s look at some of the best practices for cash flow management.
First of all, it’s smart to set targets. Having targets such as your Breakeven Point (meaning the amount of sales you have to generate in order to be able to pay all of your bills), is a smart way to do business. Of course, that’s the minimum target that you’ll want to set. Setting cash targets helps to ensure you have the cash reserves available to generate the profit that you want in your business.
Make cash management part of the culture of your business. Everyone within the business should have an interest in minimizing costs and maximizing revenues where they can. Don’t just leave this up to Directors, Management or shareholders. Why not incentivize staff to come up with some great ideas and then implement those ideas in your business.
Always hold some cash reserves. This year more than ever we have seen that business is unpredictable in a world that can be unpredictable. Holding a cash reserve means there is something to fall back on when business is slow or during those emergency times. Some companies will even have policies on this to ensure that they never have, for example, cash less than three times the monthly payroll amount in their cash reserves.
Negotiate payment terms with your vendors. Even though you probably want to be a really well reputed business in terms of how you pay your bills, that doesn’t mean you can’t negotiate the most favourable payment terms. If a vendor’s terms are 10 days, don’t be afraid to talk with them and offer to pay in say 30, 45 or even 60 days. They’ll want to keep your business, so negotiating to get the best payment terms can help you free up as much cash in your business as you can.
Try to get your customers to pay as early as possible. This will be partly based on your processes. How quickly do you generate invoices, and, how quickly do you follow up on those invoices? It’s also about incentivizing your customers. Incentives such as special offers or discounts for early payment will give you access to valuable cash you otherwise wouldn’t have.
Be persistent with debtors. From time to time people will owe you money and you will need to chase up a debt. It is important to be persistent in following up debts. Have a process in place for debtors and be ready to take the necessary actions that will secure the repayment of that debt. Some debtors will make continual promises of payment in the hopes that you will eventually grow tired of chasing them and write off their debt. Talk with them and let them know you expect to recover your cash. It is always a good idea to try to work with your debtors to recover your cash. Perhaps offering a short term payment plan might get a better result than demanding full payment within a certain time frame.
Use a good accounting system. There are many accounting systems and tools out there to give you better visibility into your cash position now and in the future. Most accounting software will show your accounts payable and accounts receivable, have reporting tools, monthly forecasting and integrate with your Banks. Using a good accounting software package will help simplify your accounting processes and keep your cash flow track.
If you have any questions or need help to create your cash management plan, talk to us today. We look forward to helping you and your business create good cash flow now and in the future.