3 Ways to Manage Cash Flow Like a Pro
Cash flow is the money that comes in and out of your business. Cash comes in when your clients pay for the goods and services that you provide. Cash goes out when you pay for your supplies, salaries, rent, etc. It is of course ideal to keep your cash flow positive where more cash comes in than goes out.
When does cash flow management become a problem? Cash flow management can become a little bit tricky when you start growing as a company and you start giving your customers better payment terms. This is when your business records sales before it receives a customer’s payment.
So let’s get to it. 3 Ways to Maximize Cashflow like a Pro, as promised.
1. Collect, collect, collect!
- Start with a properly written contract. State clearly when you expect payment from your buyer. Make sure that your buyers understand when they’re supposed to pay invoices issued to them. Try to offer discounts for early payment and penalties for late payment.
- Set credit limits with your buyers. A credit limit is the maximum outstanding amount of sales your business allows for a buyer. (Example, you’re not selling more of your products to a buyer because they haven’t paid their last invoice of Php500,000 yet. This means your credit limit for this buyer is set at Php500,000.)
Don’t be afraid to deny or lower the credit limit to customers who pay late. If historically a buyer pays on time, you can also be more generous with them. What if it’s a new buyer? One way to check if they deserve higher limits is by analysing their financial statements. You can also purchase a credit report from an agency, or check with a trade credit insurer.
- Have a strong collection team. Call your buyer when payment is due. Don’t be afraid to ask for payment. This only shows buyers that you have a system and they will form a habit around it. Remember, their payment is the most important part of a sale.
2. Stretch your own expenses!
- The biggest expense other than salaries is paying for supply. Hence, make sure you choose your suppliers wisely. Do they provide early payment discounts? Are they providing you payment terms? Negotiate longer payment terms with suppliers who you’ve had the longest relationship with. If your suppliers’ payment terms are not competitive, look for new suppliers.
3. Secure your sources of working capital.
- One of the easiest ways to improve cash flow is to have your receivables financed by a lender. Stop waiting to get paid after 60, 90 120 days. Free your cash from being trapped in receivables by approaching lenders who can take over the waiting period for payment. Lenders will charge for interest payment, but the cost can often be offset by taking advantage of supplier discounts for your early payments. Another way is by passing on the cost of financing to your customers.
- It is crucial to secure a receivable financing line as early as possible. Don’t wait until you are in a cash flow crunch to secure additional sources of liquid cash. Don’t be complacent, it sometimes takes time for lenders to provide you with a receivable financing line. Some lines wouldn’t be enough, providing you only credit up to 50% of your invoices. They might request for you to purchase trade credit insurance, so they feel more comfortable with your receivables. But often, when you have trade credit insurance, they are willing to extend your credit line higher or lower your interest rates because by virtue of the insurance, buyer’s default risk is mitigated.
Take control of your cash flow now. As prescribed above, there are ways to make certain that your cash outflows do not overshadow your cash inflows. Now go, don’t be afraid to grow. But don’t let your growth kill you.
Disclaimer: The views and opinions expressed by the author does not necessarily reflect the official policy or position of Vesl Pte Ltd. Should you wish to contact the author of the blog, you may do so by contacting her here.