Managing your cash flow in your everyday operations is extremely important to your company’s success, and even more so when things start to get tight in terms of your ability to pay bills. Different articles we have written touch on this topic, but in this article, we want to outline six specific ways to help better manage your cash flow.
1. Accounts Payable and Accounts Receivable
Most every company will have accounts payable and accounts receivable. Payment terms differ greatly between certain industries and can also differ from company to company.
Managing your payments can be a vital source of cash flow. While we don’t recommend “slow-paying,” sometimes paying early can be harmful to your cashflow.
For example, let’s say you purchase material from a company, and the payment terms are net 30 days. If you pay in 10 days without the option of a discount, that is 20 days early.
Above all, communicating with your trade partners is key. If you regularly paid in 10 days and now expect to start paying in 30 days, make your partner aware of that. (They are also working to manage their cash flows). Setting up automatic payments can also take some of the busy work away and eliminate human error.
Just as managing when you pay is important, it’s also vital to manage when you get paid. Again, different industries have different business norms for payments terms, but late payments are never okay when trying to manage cash.
If late payments are an issue, then ask: Why are your customers paying late? Poor invoicing? Lack of clarity? Poor collections strategies? Lack of flexibility?
Offering a discount may be an option. 2/10 net 30 means you will give your customers a 2% discount if they pay you within 10 days of the invoice. This can help increase cash flow, but it will cut into your profit margin, which is something you need to consider.
2. Just-in-Time Inventory Management
Inventory management can also provide some much-needed cash flow. If you apply the just-in-time inventory management model, then your company will purchase inventory only when it’s needed.
While this approach is great in theory, it’s not easy to accomplish. Succeeding with the just-in-time model takes an extensive knowledge of your sales pipeline, manufacturing timeline, and supply chain. When implementing this strategy, many companies run into issues, like not having a part or material. Sometimes, these inventory issues hold up an entire project and delay delivery.
However, if executed properly, the just-in-time strategy for inventory management can save you much-needed cash by eliminating excess inventory and freeing up storage space.
3. Working Capital Line of Credit (LOC)
Opening a working capital line of credit with your bank can help you manage your cash position. Most working capital LOC accounts have a variable interest rate and are secured with an “all asset filing” by your bank. The draw limits are often tied to your inventory and receivables balances (example — 50% of inventory and 75% of receivables).
One of the main advantages of a working capital LOC is that it creates flexibility. There are few limitations on what you can spend the money on as long as the expenditure has to do with your business’s operations.
4. Using Term Debt for Your Cap Ex
You can take advantage of long-term financing to finance different capital expenditures instead of using the cash you have on hand. We have written an entire blog article on this topic, which we suggest reading.
5. Extending Credit to Customers Who Are Credit-Worthy
Late-paying customers can hinder your company’s cash flow, so you need to understand the full picture of a customer’s creditworthiness before you give them credit terms. Companies such as Dun & Bradstreet and Paynet will give you a report on the creditworthiness of your customers. If you do not have access to those resources, you can ask yourself the following questions about new customers:
- How long have they been in business?
- Can they get references from a bank?
- What industry are they in?
- Are they recognized and regarded well by other customers?
- Do they have an online presence?
The answers to these questions should provide you with a general idea of the creditworthiness of your potential customer.
6. Manage Expenses
Managing expenses is not only important on a day-to-day basis, but there may need to be budget cuts depending on your company’s situation. While ideas in this article can help you manage your expenses, it is up to you as a business owner to decide which expenses you can cut without hindering the operations, morale, and overall health of your business.
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The content provided here is for informational purposes only. For financial advice, please contact our commercial financing experts.