9 Cash Flow Management Strategies and Best Practices

Managing cash flow is crucial for business owners—especially during uncertain times. Effective cash flow management ensures stability and allows your business to meet its obligations and take advantage of opportunities.

By following the tips and best practices outlined below, you can craft a cash flow management strategy that optimizes your working capital for profitability and growth, even in an uncertain economic environment.

Cash Flow Management Strategies

There’s a saying in business: cash is king. Why?

According to SCORE, 82% of small businesses fail due to cash flow problems. It’s not lack of a market, customers, or even revenue that does them in. It’s cash flow issues that make it tough to cover expenses, pay employees, and generate a profit for owners and investors.

Fortunately, there are several steps you can take to prevent negative cash flow from creating problems for your business.

1. Forecast your Cash Flows

Cash flow forecasting is the cornerstone of effective cash management. A cash flow forecast predicts the inflows and outflows of cash into your business, allowing you to anticipate shortages and surpluses and plan proactively.

To create a cash flow forecast:

• Gather historical data. Analyze past financial statements to identify patterns in revenues and expenses.
• Project future cash inflows. Estimate future sales, considering seasonal trends, market conditions, and economic factors.
• Estimate cash outflows. Include all anticipated business expenses, such as payroll, rent, utilities, and debt repayments.
• Adjust for variability. Incorporate potential changes in market conditions, customer payment behaviors, and supply chain disruptions.

Most businesses can benefit from rolling 12-month cash flow projections that are updated at the end of each month.

You can use a spreadsheet like this cash flow forecast template from Microsoft. However, modern cash flow forecasting tools can automate much of the data gathering and save you time.

2. Optimize Accounts Receivable

Many businesses run into cash flow problems because too much revenue is tied up in accounts receivable. Efficiently managing your accounts receivable accelerates cash inflows and reduces the risk of bad debts.

If you sell on credit, assess the creditworthiness of new customers and set credit limits accordingly. Then ensure you send invoices promptly—immediately after you deliver the goods or services.

Be clear about your payment terms and consider offering early payment discounts to encourage customers to pay invoices quickly.

Establish a routine for following up on overdue invoices, including reminder emails and phone calls. A simple phone call or email can often encourage a slow-paying customer to pay their bills.

3. Control Your Expenses

Controlling expenses is crucial for preserving cash, especially during uncertain times.

Review your expenses regularly to identify and eliminate unnecessary costs. Consider adopting energy-efficient practices, negotiating better rates with vendors, and leveraging technology to reduce operational costs.

4. Manage Accounts Payable Strategically

Faced with a cash flow crisis, many businesses delay payments to vendors and suppliers. However, this approach can backfire by eroding supplier relationships and damaging business credit.

Instead, take a proactive approach to accounts payable management.

• Negotiate payment terms. Don’t just pay invoices late. Ask your suppliers to extend payment terms. Suppliers are more willing to work with you when you’re transparent about your needs and pay invoices when you say you will.
• Prioritize payments. Pay invoices strategically by prioritizing those offering discounts for early payments or critical supplier relationships.
• Utilize trade credit. Take advantage of trade credit to delay payments without incurring interest.
• Schedule payments. Align payment schedules with cash inflows to avoid liquidity crunches.

Effectively managing your accounts payable helps maintain positive supplier relationships while optimizing cash outflows.

5. Maintain a Cash Reserve

Adequate cash reserves act as a financial buffer, providing security during economic downturns and enabling the business to seize growth opportunities.

The common rule of thumb is that your cash reserves should equal three to six months of expenses. However, you may need more if you’re a startup, highly leveraged, or in a business that’s seasonal or very sensitive to economic downturns.

If that sounds impossible, don’t panic. Set a goal and then regularly allocate a portion of profits to a reserve account. Even a small cash reserve is better than nothing.

Over time, you can grow the balance and adjust your target as the business evolves.

6. Utilize Financing Options

Short-term and long-term financing can bridge cash flow gaps and support business growth.

Short-term options include a line of credit, business credit card, and invoice factoring. But the time to get these financing options in place is before you need it. Planning ahead can help you secure a more favorable interest rate and terms.

Long-term options like a business loan or equipment financing are better suited to long-term investments or substantial cash flow needs. You can space payments over several months or years to maintain a healthy cash flow.

7. Streamline Your Inventory Management

Managing inventory is a crucial part of cash flow management. Excess inventory ties up capital, while insufficient inventory can lead to lost sales and dissatisfied customers.

Ensure you track the quantity of products you order and the quantity you sell. This will allow you to determine whether you’re overstocking or understocking.

Whenever possible, get smaller orders more frequently. Instead of tying up cash in slow-moving inventory, you can recoup the money you spent to buy products or materials quickly.

Finally, have a system to liquidate dead stock. Consider offering it to customers as a free gift, bundling them with other products to increase the perceived value, or holding clearance sales to quickly get rid of dead stock. While you might not increase your margins with these methods, you will generate some cash while freeing up space on your shelves for more profitable items.

8. Leverage Technology and Tools

Modern technology offers various tools for streamlining cash flow management and providing real-time insights.

The first essential tool is your accounting software. Using QuickBooks, Xero, Sage, NetSuite, or another platform can help you automate invoicing, track expenses, and generate financial reports.

If you want more functionality, cash flow management apps like PlanGuru, Float, or CashAnalytics can integrate with your accounting software and provide a more advanced cash flow analysis.

9. Work with an Accountant

One of the most essential cash flow management tips is to work with an accountant who can help you understand your company’s cash flow and help you identify and implement proper cash flow management processes.

Your accountant can get to know your business, recommend strategies to increase cash flow, and suggest tools and apps to help you accomplish your goals.

You don’t have to handle cash flow issues alone. Contact Percipio Business Advisors today. With the right team of advisors, you can mitigate risks and be empowered to capitalize on new opportunities.

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