How to manage cash flow

Dave JonesBusiness Matters, Finance for Non-Financial Managers0 Comments

What is cash flow?

Let’s begin with some definitions: cash is about funds you can lay your hands on such as money in current accounts and easily accessible, short-term deposits; profit is about what your organisation earned compared with the costs it had. Cash is not the same as profit.

Cash flow is the change in net loans or net cash over a particular period as a result of the flow of cash that has happened between the opening and closing of that same period. Cash flow comes from three sources: retained profit, the movement in net assets between the end of the previous period and the end of the current period and new share capital. Stated simply, positive cash flow is where you’re getting more cash in than you’re paying cash out. Negative cash flow is the opposite.

Why is cash flow important? You need cash to pay your bills and you may also need cash to develop your business. For a great way to understand cash flow and its place in good financial management you’ll want to sign up to our Finance for Non-financial Managers course.

Top cash flow management tips

  • Create the right mind-set: understand your business so you have a picture of what goes out and what comes in.
  • Watch your budget like a hawk to predict and adjust for possible problems.
  • Research potential customers to see if they are a good risk before you decide to extend credit.
  • Stipulate the payment due date, specify the penalty for late payment, invoice promptly and then chase payment.
  • Build in early warning systems that alert you to possible cash flow problems.
  • Establish which measures you will use and which business objectives you will compromise on in order to increase cash flow in an emergency.
  • Make it easy for customers to pay you.
  • Formulate policy for dealing with companies that want longer to pay.
  • Offer discounts for early payment but beware of making them too generous!
  • Incentivise companies to bring forward purchases.
  • Reduce what customers owe you by cutting back on customer credit periods and factoring debts.
  • When searching for suppliers look for those that offer the best deal and flexible payment terms.
  • Negotiate longer credit terms with your suppliers.
  • Establish good relationships with finance sources and suppliers by sticking to promises, by being open and by communicating.
  • Arrange finance before you need it for this shows that you are organised and responsible.
  • Have strategies in place for cash flow surpluses and shortages. These may range from paying down debt to getting new equity.
  • Pay your bills on the date due and not before.
  • Minimise all outgoings and ditch unnecessary ones.
  • Cut delivery lead times to the minimum.
  • Check your cash flow before increasing expenditure or overheads.
  • Avoid bulk ordering so that stock doesn’t tie up cash flow, get rid of unnecessary assets and poor product lines.
  • Control stock efficiently to reduce the amount of cash sitting on your shelves.
  • Consider selling and leasing back assets like machinery but don’t miss payment or you could lose your assets.
  • Don’t take on more work than you can cope with financially and ensure you get deposits and stagger payments where necessary.
  • Many of the above tips apply even if you’re exporting but specific things to think about include checking out all finance options, understanding local economic conditions and legislation and hunting out ways of protecting yourself from non-payment by customers abroad.

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