Managing cash flow can be one of the biggest challenges for any business establishment, big or small. Almost every business goes through these challenges, especially when there is a lag between the time you pay your suppliers and staff, and the time when you receive payment from your customers. To overcome this lag, effective cash flow management is an absolute necessity.

Keeping on Top of Finances with Effective Cash Flow Management

So what all does it take to better manage your cash flow? The answer lies in the following steps -

1. Preparing Accurate Cash Flow Projections - 

For effective cash flow management, it is important to prepare accurate cash flow projections so that you are better prepared to deal with upcoming challenges. When working on the cash flow plans and projections, you need to make educated guesses on the basis of several factors like customers' payment histories, accuracy in identifying upcoming expenses and your terms with the vendors. Unrealistic assumptions like receivables will suddenly start coming in earlier than before can lead to inaccurate forecasts. Thus, it is best to keep it real and begin your cash flow plan by including the cash on hand at the beginning of the period, along with the cash that is to be received from different sources. It is also necessary to have detailed information of the amount and dates of upcoming cash expenses. With the help of monthly spreadsheet templates you can make accurate cash flow predictions.

2. Managing Receivables - 

In almost every business, the most recurrent cash flow problem occurs due to delayed payments by the customers for the sales you made. However, for better cash flow management it is very important to improve the receivables. The key is to escalate the process of turning raw material into products and selling them and getting cash in return as soon as possible. To achieve this, you can use some of these techniques -

  • Speed up your cash conversion cycle.
  • Set credit limits for your customers on the basis of their detailed credit check and analysis.
  • Offer discounts to the customers as an incentive for early payments.
  • Establish standard procedures for overdue receivables.
  • Sell off outdated inventory as early as possible for whatever amount you get.
  • For slow paying customers, you can provide cash on delivery option.

3. Improving Payables - 

In your race to expand sales, you should not overlook the growing expenses. Whenever, the expenses are higher than the sales, you should take measures to reduce your costs. Some of the best ways of better managing your payables are discussed here -

  • Negotiate longer payment terms with your suppliers.
  • Avoid making early payments to the creditors.
  • Whenever possible, use electronic funds transfer for payments on the due date.
  • Watch out for the discounts offered by creditors for early payments. These early payments can lead to expensive loans to your suppliers or reduced overall costs. It is best to measure the benefits vs cash going out the door for early payments before signing up for it.

4. Overcoming Shortfalls - 

It is very common to get into a situation where you won't have enough money to pay your creditors. This often happens due to poor cash flow forecasting and management. To ensure that you can overcome cash flow shortfalls, it is best to identify the problem accurately and as soon as possible. Arranging a line of credit at your bank is also advisable when you have forecasted a shortfall. If getting loan from the bank is not an option, you can seek help from your suppliers and get extended terms from them on the payments.

Cash flow management is all about proactive measures and accurate planning for your accounts, payables receivables and working capital. To ensure that you don't run out of cash, you should incorporate the above discussed measures and stay on top of your finances.