Manage your company’s working capital more effectively with these helpful tips.
Of all of the skills that successful entrepreneurs need to master, there is perhaps none more important than cash flow management.
That’s because even companies that are operating smoothly by other measures can be pushed to the brink if they fail to manage their cash flow effectively. As a result, entrepreneurs must learn to master their cash flow management from day one, ensuring that their inflow always exceeds their outflow.
Here are 10 tips to help you stay on top of your cash flow.
1. Make a budget
Staying on top of cash inflows and outflows first requires a thoughtfully estimated budget that factors in some of the natural ebbs and flows of entrepreneurship.
Start by considering factors that could affect inflows, such as sales cycles, discounts and industry delinquency rates. Then balance that with potential expenses, such as equipment, supplies and raw materials, as well as overhead, taxes and other day-to-day expenses.
It’s important to also consider the timing of these inflows and outflows to ensure you’re not left with a pile of bills and an empty bank account.
2. Check it twice
As any entrepreneur can attest, even the best-laid plans on paper never perfectly align with reality, which is why it’s important to continuously update and tweak the budget accordingly.
Investigate any unexpected cash flow shortfalls or surpluses at least once a month so you can better align your budget with the realities of the company.
3. Prepare for late payments and delays
Entrepreneurs operating on too tight of a cash flow balance may find themselves in a sticky situation when payments aren't received on time. Sometimes customers are delayed a few days or weeks on sending payment, and other times an invoice may go unpaid for much longer.
Never fail to plan for the unexpected and properly estimate the arrival of various revenue streams that can balance out your expenses.
4. Have a backup plan
No matter how successful, most businesses will experience a slump at some point in their journey. Knowing that the sun can’t shine on your company forever means that you should always have a rainy day fund to help weather any storms on the horizon.
Whether your backup plan is a savings account, a line of credit or personal assets, it’s important for every business owner to know exactly how they intend to keep the company afloat should they find themselves in trouble.
5. Bill fast and collect quickly
Companies with healthy bottom lines typically run into cash flow problems as a result of poorly planned billing cycles. Even after completing a highly lucrative project or task, companies often put themselves at financial risk as they await compensation.
As a result, it’s always good practice to send an invoice as quickly as possible. Insist on a brief payment term and include penalties for late payments.
6. Consider offering discounts for early payment
One way to incentivize quick payments in times of need is by offering discounts for early payments. While this could serve to reduce overall cash inflow, the strategy could be a lifeline to companies struggling to maintain their cash flow balance.
7. Be careful not to overhire
Salary and benefits are some of the largest expenses, and shouldn’t be taken lightly. Before posting that job listing, be absolutely sure your business needs additional staff and that existing employees cannot cover those duties.
You can also consider hiring a freelancer or vendor to handle special projects to get you through a busy period of time. If your business stays that busy, then it may be time to staff up full-time.
8. Don’t cut corners on hiring
Should you decide to grow your headcount, it is often better to pay a little extra for a more qualified staffer than run the risk of having to replace them or hire additional staff to cover some of their duties in the future. Turnover costs from hiring the wrong fit can also be a huge hit to your cash flow.
9. Understand the tools at your disposal
One of the greatest opportunities for significant savings comes in the form of online business tools and applications.
Whether you’re looking for a bookkeeper, legal advice, an executive assistant, an employee rewards program or marketing assistance, many of the traditionally expensive services are now available through online providers at a significantly lower cost.
10. Let an expert manage your funds
No matter how capable the entrepreneur, cash flow is typically managed better by a financial expert that’s one step removed from the day-to-day operations of the company.
For those with the resources, this could mean hiring an accountant or CFO, or even a trusted employee to monitor cash flows, track expenses and follow-up on unpaid invoices.
Whether you employ someone internally or engage expert external help, doing so will allow the entrepreneur to outsource a mentally draining activity. Adding a second pair of eyes to the most important aspect of running your business is always a good thing.