Managing cash flow in a small business is crucial, especially if you want to get your feet off the ground. But you can’t simply worry about selling and revenues. You know you also need to tightly manage cost. Even then, you can easily fall short if customers don’t pay in a timely manner, but you pay your suppliers promptly. Then there’s all that money tied up in work in progress or inventory on hand, and you may not realize the full cost of carrying inventory. Did you know that you could make a profit and still not be able to pay the bills? From accounts receivable to inventory management software, here are some tips to manage cash flow.
Cash flow can be managed by calculating your company’s cash conversion cycle. In layman’s terms, the cash conversion cycle is how long it takes for you to convert the resources you spend on inventory, sales efforts, and production into cash. Typically, a company gets inventory on credit, which becomes their accounts payable. Customers then buy their products on credit, which becomes their accounts receivable. The cash conversion cycle ends when the company has collected actual cash from customers and when the company has paid for inventory, property, and equipment. Figure out how much time, in days, your company’s cash conversion cycle takes. Once you figure this out, you can start strategizing ways to speed up the cycle and see cash flow sooner.
Keeping your accounts receivable policies in check is one of the most important ways for you to manage your cash flow. You should make your accounts receivable policies strict to make sure that customers pay you on time. Try not to send out merchandise before you’ve received payment. Always send out invoices to customers as soon as possible. If customers want to pay with credit for considerably expensive goods and services, you can do a credit history background check on them to ensure that they will be able to pay you regularly on time. Don’t be afraid to charge a late fee to customers who don’t pay on time. You can also send them notifications by email, phone, or snail mail to remind them of what they owe you. Once you have some long-term customers, you may want to look into creating an accounts receivable aging report. This will allow you to monitor the payment patterns of your regular customers, and it will allow you to know which ones may need a nudge every once in a while to be reminded to pay.
You should also figure out how to work your accounts payable to your advantage. Your goal should always be to get the most cash flowing into the company as quickly as possible. You don’t want to get paid slower than you are paying. Look for flexible payment plans from vendors, and wait as long as possible to pay your vendors. Just be careful and pay your bills before deadlines pass. You don’t want to ruin your company’s credit. A bad company credit score can make it really hard to expand your company when you’re ready to. You can set up an electronic funds transfer system with the bank to pay your bills. This will allow you to pay them the day they are due, rather than having to send out money several days before.
Keeping track of inventory can get can be tough, but it doesn’t have to be. Most people tie up the bulk of their money in raw materials, work in progress, and final goods inventory. It’s hard to manage all of this without the help of inventory management software. Check out inventory management software options online. This type of software lets you monitor your inventory, orders, and shipments easily. Having quick access to inventory information allows you to keep track of what you’re selling and how much of a profit you are making from it. This information can be used to help you figure out what inventory you are carrying but not selling, so you’ll know to order less of it in the future. You should also look into more tips about managing your inventory and cash flow. Business self-help websites and books about cash flow are good places to start.
Every new business must successfully master how to manage cash flow. Understanding your cash conversion cycle, being conscious of accounts receivable and accounts payable, and using inventory management software will help you master the art of increasing positive cash flow.
This article is sent by Margot McClelland
