Eight Steps to Managing your Cash Flow

I've got the sales and the margins are good, but where is the cash?

While running your business at a profit is important to survival, it is equally if not more important to ensure that you have a positive cash flow to meet your business obligations. Profits and a positive cash flow are key to the health of your business.

Good cash flow planning takes three things into consideration: the amount of cash coming in, the amount of cash going out, and having cash when you need it.

• Understand your sales cycle
• Optimize your collection policy
• Control your purchases
• Pace your payments
• Use your bank
• Manage your assets
• Plan your taxes
• Balance cash flow and profitability

Understand your sales cycle

• Is your business seasonal?
• Does your business generate revenue only during select periods? On a regular basis?
• Do you accord your customers 60 day terms for payment while your suppliers expect payment in 30 days?

Tip: Understand the peaks and valleys of your business cycle in terms of cash flow and plan accordingly by preparing a cash flow forecast.

Optimize your collection policy

• Are your credit granting policies negatively impacting your cash flow?
• Do you have an effective monitoring system to help you collect your receivables on time?
• What is your average collection cycle? Can you collect faster?

Tip: If you generally grant 30 day terms to your customers, your average collection cycle should generally not exceed 45 days.

Tip: To improve your cash flow try to speed up your average collection cycle.

Control your purchases

• Is your purchase policy getting in the way of maximizing your cash flow? Are you placing orders systematically?
• Are you able to obtain trade credit from your suppliers, or do you have to pay upon placing orders?
• Do your suppliers have a return policy?
• Do you balance supplier discounts with cash flow availability?

Tip: Order only what is selling. Source from suppliers who do next-day deliveries, or adopt a just-in-time policy.

Tip: Establish a credit account with your suppliers and ask your banker or a current supplier to introduce you to new suppliers.

Pace your payments

• Are you paying your employees on a weekly basis? Can you change this cycle to biweekly or monthly?
• Do you pay all your accounts on time or before the due date?
• What is your average payment cycle? Can you stretch it?

Tip: To improve your cash flow try stretching your average payment cycle: an extra 5 days can have a positive impact on your cash flow.

Tip: Learn more about payment options available.

Use your bank

• How quickly do your sales receipts get to your bank accounts?
• Can you make deposits to your bank account at 11PM and get same day credit?
• Can you access banking information at your convenience?
• Do you have access to a line of credit that will cushion you during negative cash flow periods?
• Are the repayment terms of your loan "in sync" with your cash flow cycle?

Tip: We offer a variety of alternative collection options.

Manage your assets

• Are you tying up your cash with more inventory than you need?
• Have you considered carrying inventory on consignment?
• Do you know your rate of inventory turn around? Which items go faster? What is the norm in your industry?
• Have you considered leasing rather than buying an asset?

Tip: Consider selling all non-productive assets and consider leasing assets that become obsolete quickly.

Tip: Identify slow moving inventory and sell it at a discount to generate cash and pay off loans.

Plan your taxes

Are you maximizing your tax reductions and deferrals?

Tip: Don't fool around with the tax authorities: ensure all regulatory payments are met on time.

Balance cash flow and profitability

• Are your sales growing at the expense of your margins?
• Can you pass increased costs from your suppliers to your customers? How quickly?
• Do you have a minimum order policy?
• Do you keep supplying customers who are seriously in arrears?
• Can you avoid paying interest by using trade credit with your suppliers or using credit cards offering interest-free periods?
• Is it worth your while to borrow in order to take advantage of a trade discount?
• Are your sales increasing but you can't collect?

Tip: Remember that a sale is not a sale until the money is in the bank.

Tip: You need cash to honour your business obligations; inability to meet obligations leads to insolven1cy and potentially to the demise of your business.