Cash flow is the fuel your business needs to keep running smoothly. Here are a few techniques you may want to consider to improve your operation.
1. Budget cash flow.
Create a cash flow budget to make sure you can pay expenses; it allows you to be proactive in monitoring revenues and expenses. Include sales/revenue forecasts, receivables, and outflows including costs of goods, debt payments and operating expenses.
2. Understand sensitivities.
It is important to know which items impact cash flow most among price, volume, costs or overheads. Cost of goods is a key component but may be difficult to change. At the same time competitive pressures may prevent a price increase.
Effective credit policies are a key component to successful cash flow management. Early payment can be encouraged through discounts on early payment or penalties for late payment. Careful monitoring of late payments is important so they do not become write-offs or tie up working capital.
Review payables regularly to maintain obligations. An aging schedule will show you how much you owe and whether anything is past due.
5. Reduce costs
Review operations for ways to reduce expenses. When business volume accelerates consider hiring contract or part-time staff before committing to full time employees.
Good luck with your review and improving your cash management. Your banker will appreciate your efforts and this can have a positive impact on the banks impression of your business and the professional management approach.