Cash flow and liquidity are more critical than profitability for most businesses. Understanding the challenges of cash flow management is the key to a financially strong company.
For better control over your business’s cash flows, let’s divide the strategies for inflows and outflows.
Strategies to Manage Cash Inflows
Cash inflows are what your business receives from sales, investments, and other income sources. Optimizing cash inflows mean more cash in hand.
Optimize Pricing Strategy
Merely increasing prices to boost cash inflows wouldn’t work. You’ll risk making prices uncompetitive and result in lower sales than ever.
Instead, take time to optimize the pricing strategy by cutting down the input (raw material), labor, and marketing costs.
Once you find a way to offer discounts or lower prices, you can boost sales and improve cash inflows quickly.
Every business wants to sell more. However, it does not just mean producing more and increasing production volume without planning.
Invest time to research product or market expansion plans first. You can boost sales by either offering the same products to a new market or offering new products to the existing market.
Either way, it’s a substantial effort but can help you improve cash inflow significantly in the long term.
Offer Incentives to Customers
Encourage your buyers to pay you early. Offering incentives on invoices to pay quickly is an effective method to improve accounts receivable collection.
For instance, offer a 5% discount to your customers if they pay the full invoice amount in 10 days or no discount if paid in 30 days.
Consider Invoice Factoring
Piling up unpaid invoices means disrupting cash inflows. However, it’s inevitable for many businesses as they keep hoping to maintain good business relationships without actively pursuing invoices.
If you have long-standing invoices, consider invoice factoring as a way to get a cash advance for your business. Outsourcing the collection may cost you a proportion of the total receivable amount but will certainly help you improve cash inflows.
Strategies to Manage Cash Outflows
Another way to manage the cash flows of your business is to keep the outflows under control. However, simply avoiding expenses can hamper the progress of your business.
Improve Operational Efficiency
An effective way to reduce expenses is to improve operational efficiency. Even when you haven’t automated all operations, you can utilize human resources efficiently.
Operational efficiency means optimizing the resources at hand. It includes utilizing labor, inventory, energy, and time resources.
Then, you should focus on minimizing the idle labor/machine hours, waste, and bottleneck activities of the business.
Rethink Supplier Relationships
If you simply start delaying payments, it will hurt supplier relationships. You can negotiate extended credit terms without sacrificing timely deliveries.
Keep a steady payment schedule to win the trust of your vendors and suppliers. Then, ask for extended payment periods or delayed payments during crunch times.
Good supplier relationships will also help you optimize inventory levels. When you find trusted suppliers, you do not need to keep the bulk of inventory that ties up cash significantly.
Also, conduct inventory audits regularly to avoid spoilage and remove inventory items that move slowly through the production line otherwise.
Top Tips to Manage the Cash Flow of Your Business
Here are a few quick tips to manage the cash flows of your business efficiently.
- Use automated invoicing to quickly send invoices and collect payments faster.
- Offer more payment options to your clients by accepting electronic payments.
- Reduce overheads by controlling non-essential expenses and discretionary spending of your business.
- Find out current assets of your business that are under-utilized or no longer useful. Dispose of these assets to release cash.
- Encourage your staff to improve their skill sets and optimize staffing needs by retaining valuable employees. Do not lay off employees without strategically matching the staffing and production needs.
- Consider asset leasing wherever possible over buying when facing cash flow problems.
- Improve your cash flow forecasting techniques and plan to meet these needs.
- Many businesses fall into debt traps because they don’t have contingency planning. Make sufficient room for emergencies to avoid expensive borrowing.