Have you ever heard the saying “Cash is king”? Well, it’s true: Managing and improving cash flow is vital to the health and success of a business, as it can ensure there’s money to invest for growth, pay the bills and keep the operation running.
Here are three ways you can better manage and improve your cash flow.
1. Create a statement
A cash-flow statement or template reports all the funds generated and spent by a business in the course of operating, investing and financing. It shows where the money comes from and where it goes, and helps highlight areas where a sales increase or an expense cut can improve the operation’s financial position.
This template from SCORE, a nonprofit organization set up to help small businesses succeed, breaks down cash flow over a 12-month period. It provides two columns: one for receipts, including projected annual sales and account collections, and the other for expenses, such as employee salaries, rent, supplies and debt interest.
Another site, called Docstoc, offers a sample cash flow statement spreadsheet that you can either download or print out for free. It provides three sections — cash flow from operating, investing and financing activities — plus the net increase in cash and equivalents for each year.
2. Collect receivables
Do you have customers or suppliers who pay for goods or services later rather than right away? Instead of getting paid in a month or two, you could turn those unpaid invoices into cash now.
One way to do this is to offer early payment discounts, say 5% to 10% of the total. This gives suppliers an incentive to pay sooner. Although you may make less money, the improved cash flow can give you more to invest in growth or to pay off debt.
Invoice factoring is a type of financing that converts a portion of your receivables into cash upfront. It works like this: You sell your unpaid invoices at a discount (1% to 5%) to a factoring company. The buyer gets paid when it collects the bills, while you get almost all the cash you expected now instead of later. Also, you don’t have to bother with dunning those who owe you and you can bank the cash much sooner.
Another option is a receivables line of credit, which is a short-term lending facility secured by what’s owed to the business. Instead of getting cash upfront, you can borrow a percentage of the receivables and repay the debt as you please.
A receivables line of credit can provide financial flexibility. Just keep in mind that what’s owed to the business secures what you borrow, so if you fail to repay the debt, those business assets could be forfeited. Typically, there’s also interest charged on the debt.
3. Minimize expenses
By reducing expenses, you can boost your cash flow even without a sales increase. Here are a few ways this can be done:
- Refinance high-interest debt at a lower rate. This can save interest costs and lower monthly payments.
- Consider negotiating to lower regular monthly expenses, such as phones, Internet service, utilities, rent or insurance.
- Downsize your space to lower rent costs, if you have too much room.
- Try to cut routine charges, such as credit or debit transaction fees. Shop around for lower-cost processors and negotiate for better rates.
- Cut utility bills by using energy-efficient appliances or by weather stripping the windows, which can reduce heating and cooling costs.
Using technology can also save your business time, money and simplify your accounting process.
Poor cash-flow management can mean the difference between business success and failure. Following these tips can lead to improved financial health and provide funds to invest in growth.
Steve Nicastro, NerdWallet