While it may sound obvious to conclude that the net profits of a business are the most important indicator with which to measure a company’s worth, the reality is that cash flow is just as important, and sometimes even more so. There are a lot of reasons for this – one would be that profits can be manipulated in the income statement more easily than cash on hand can. Net profits may be seen as a theoretical concept, while the cash that is accessible to the business is the more concrete way to see how an enterprise is actually doing.
Consider how profits can be determined largely in non-cash terms – they can be in the form of assets such as receivables. Some of these decrease in value over time, which limits the accuracy by which profits are measured. Some receivables can even be totally insignificant in the future – if for example a client pays too late, or worse, if they don’t even pay at all – then the asset that determines the value of the corresponding net profit decreases, which decreases net profit as well. This is the reality of business – that is why it is important to manage your cash flow wisely.
Cash flow measures the liquidity of an enterprise – and this is indicative of your overall paying capacity. The bigger the amount of cash the business has on hand, the more reliable they appear to their employees, suppliers, and other creditors – these entities can rest assured that they will be paid their due in a timely manner.
These are just some of the reasons why it is important to effectively manage the cash flow for your business. Here are some ways you could do that:
1. Collect your receivables as soon as possible.
If possible, have your customers pay immediately upon delivery or before they receive the goods or services they ordered from you. Prepayment is the best option, and it works – this is how most eCommerce businesses conduct their transactions. They usually ask for proof of payment before they deliver the items to their customers.
If possible, have your customers pay immediately upon delivery or before they receive the goods or services they ordered from you.
If prepayment is not possible, push for cash payments upon delivery. This is pretty reasonable for most retail-scale businesses.
For industry-scale trading, where the volume of goods and/or services and the corresponding amounts are considerably larger, do your best to get the shortest payment terms from your customers as possible.
Invoice them as early as you can. This will ensure that you have done your part in guaranteeing timely payments. It will also show your clients that you are taking your collections seriously. This is the best way to be professional about your intentions.
2. Get more flexibility in terms of your payables.
You can ask your suppliers to extend you credit terms, and you can attempt to make this as long as they will allow. This will let you be able to keep your cash in your hands for as long as possible, giving you leeway to pay for more pressing concerns. Just make sure that you don’t miss your deadlines, as some suppliers may charge interest rates for overdue payments. This is something you should avoid at all costs – as it will defeat the purpose of the exercise.
3. Consider selling your receivables in order to get cash up front.
If you have initially already extended credit terms to your clients, you may find yourself in need of reprieve in future situations. Some clients may also be unreliable in terms of meeting deadlines. You have the option to sell your receivables to get the cash you need immediately. For example, some staffing companies enroll in payroll funding, where the financing company purchases unpaid invoices from you, allowing you to have cash 24-48 hours after the invoice is presented for sale. Sometimes, you can even get your money within the same day if you request this specifically.
This is a great way to manage your cash flow more reliably. If you have a long list of creditors, with receivables that won’t get settled any time soon, this may be a viable option for you.
4. Figure out ways to increase revenue.
You can get creative in terms of how to get more cash-based sales, so at least you have a steady flow of liquid assets. Offer discounts for cash on delivery or prepaid transactions; give incentives for customers who pay on time; and conversely, set minimal penalties for late payments, just so they’re encouraged to meet their deadlines, and be faithful to their terms.
These are just some of the preliminary guidelines that can help you manage your cash flow better. Remember that there are small ways you can tweak your cash flow to work in your favor, and explore workable options that will help lighten your load.