Effectively Manage Your Cash Flow
Most people think that businesses go bankrupt due to losses, but this is usually not the case. The truth is that majority of distressed companies have sufficient assets, but not enough cash. A company can survive for years even if it is unprofitable, but it would not last a day without cash. Cash is the life blood of business, and a sure and steady cash flow is vital to all companies.
Land, inventory and machinery may be good investments, but lack of sufficient cash when needed can paralyze your business. Most transactions materialize only if a company is liquid (which means you have a satisfactory amount of cash). In addition, it would be difficult to turn assets into cash in a few days so it is vital to effectively manage your cash flow.
There are many ways to improve cash flow. Review your current practices to see what could be done to increase your liquidity:
• Avoid extending terms. Conduct credit investigations on your prospects before offering them credit lines. Do not just grab all job orders that come your way. Keep in mind that not all customers are good payers.
• Make collection as efficient as possible. Issue invoices immediately after delivery. Follow-up on clients and remind them when you will come back for the payment. This may not be a concern of retail businesses as they operate on cash basis, but traders, wholesalers, and manufacturers would do well to put up an orderly collection system.
• Manage your payables wisely. Pay on time, but not ahead of schedule. Be able to maximize your terms so that you can have interest-free capital at your disposal. Look for suppliers who can give you 30- or 60-day credit limits – the longer the better!
• Be efficient with your inventory. Avoid over stocking even if you were given good discounts or there is a pending large price increase. Be careful with your purchases, and identify fast- from slow-moving goods, and stock up commensurate to demand.
• Purchase wisely. Source for the supplier who can give you not only the best price but also the best terms. Always consider both. If the one who can give the lowest price cannot give the best terms, consider your cash situation in making the decision. Pay in cash only if you have sufficient liquidity.
• If you cannot avoid extending credit to customers, give them the shortest term possible. You may also consider offering incentives or cash rebates to encourage early payments. Be creative in thinking of rewards to clients who pay ahead of time, e.g. giving them freebies or discounts on their next purchase. Similarly, consider giving penalties for late payments. Standard rate is usually 2 percent of the invoiced amount, per month of delay.
• Ask for downpayments. Especially in job order manufacturing where you have to purchase supplies that are specific to a customer, it is important that you can at least recover the cost of materials and supplies that will be utilized.
• Delay cosmetic improvements. You must not pour too much cash in renovations. This would really affect your cash flow. The key here is to factor in the periodic renovation into your costing so that you will realize its impact.
• Cash-in non-performing assets. There may be an underutilized machine or vehicle you can sell, which can greatly improve your finances. Consider putting slow-moving items on sale. Not only does this help minimize clutter, it also helps increase your cash flow.
• Rent or borrow, instead of buying equipment you won’t be using all the time. You could also consider outsourcing instead of doing everything in-house.
• Trade, or do X-deals. Look for companies who are willing to exchange products or services with you. This way you are able to utilize the maximum capacity of your business, while being able to get resources without using cash.
• Deliver on time so you won’t have to pay penalties for not following agreements. This is also advantageous as you will be able to collect immediately or even ahead of schedule.
• Arrange a standby credit line with your bank before you really become short of cash. Banks usually give credit approval when you are in a good financial condition. You cannot get a loan if they know you are on the brink of bankruptcy. In other words, it is easier to secure a loan, when you don’t need it.
• Make cash flow projections as often as ideal. Keep in mind that your cash flow varies, depending on various reasons. You may be liquid during peak seasons and short of cash during lean months.
• Lease out excess capacity. You can earn a substantial amount of additional cash by looking for customers who can utilize the production capacity that you are not using.
Study your cash flow situation carefully. Allot enough money especially when you are just starting up. Allocate sufficient funds to operate your business for at least six months. Even if your business is already established, you must have cash reserves for potential disasters. It would be a pity to close a profitable business just because you ran out of cash.
*Originally published by the Manila Bulletin. Written by Ruben Anlacan, Jr. (President, BusinessCoach, Inc.) All rights reserved. May not be reproduced or copied without express written permission of the copyright holders.
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