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“Cash is king” is a well-known expression in the business world. But surprisingly, few entrepreneurs focus on managing their cash flow in such a way as to avoid finding themselves broke and unable to pay the bills.
“One of the biggest causes of business failure is poor cash flow management,” says Susan Rohac, Vice President, Clean Technology Division. The good news is that you can easily improve cash flow management in a few simple steps.
“Keeping your cash flow under control allows you to prepare for downturns, plan your financing and have peace of mind,” adds Ms. Rohac.
Here are five steps you can take to better control your cash flow.
1. Analyze your profitability
First, make sure your business is making a reasonable profit. The best cash flow management won’t do you any good if your business fundamentals aren’t on track.
Analyze each product and service separately to see if each contributes to your bottom line. Make sure your products are priced right and work to eliminate inefficiencies. Rather than just tracking sales, track profitable sales.
Mike Whit taker, owner of Bonté Foods, learned the consequences of poor cash flow management the hard way when he faced significant cost overruns on two major projects.
The company in Dieppe (a suburb of Moncton, New Brunswick) had to react quickly to restore its cash flow.
She analyzed her profitability and realized she needed to raise her prices to better reflect costs. Bonté Foods also got rid of low-margin product lines and launched an efficiency drive while tightening cash flow management.
The changes caused an increase in sales and profit margins. “We’ve learned to watch our cash very carefully,” says Whit taker. You always have to be one step ahead in cash flow management.”
2. Prepare cash forecasts
Then prepare a cash flow forecast for the coming year. This will be your early warning system in case something goes wrong. Use an Excel spreadsheet or accounting software to write down expected monthly cash inflows and outflows, including expected large purchases.
Use this projection to forecast downturns and plan your response. to any deviation,” advises Ms. Rohac.
3. Finance major purchases rather than drain your working capital
One of the most common mistakes is paying for the acquisition of long-lived assets out of cash rather than obtaining financing. Even if you think you can afford it, you could suddenly find yourself short of money if you face a sudden shortfall or rapid growth.
Use your forecasts to establish your financing needs in advance and not in the middle of a crisis, when bankers may be reluctant to lend. Ms. Rohac also recommends opting for financing whose repayment corresponds to the useful life of the acquisition.
4. Accelerate cash inflows
Accelerating cash inflows can save you fees on your line of credit. A few tips: Send your invoices faster, ask customers to pay electronically, and charge interest on late payments.
5. Get funds quickly when needed
Do you suddenly run out of cash? You can raise funds quickly through various means:
contact your bank;
take inventory of your inventory and assets to see what you could liquidate, even at a discount;
ask your suppliers or landlord for more time to pay your bills;
offer a substantial discount to your customers to drive quick sales.
