Managing Cash Flow

We hear this term, cash flow, thrown around a lot, but what exactly is cash flow? Basically, it is money that comes in (sales) and the money that goes out (expenses). It is the position of cash you have to cover your daily costs and pay your bills. For instance, if you make a sale for $1,000 and you receive cash payment, your cash flow is positive $1,000. If on the next day, you pay your rent for $750, your cash flow is negative $750 for that day, bringing your cash position to $250. This is a very simple illustration, but what happens when you don't receive payment on a sale for 30 days? Or what happens when you purchase inventory and don't pay your supplier for 60 days? Your cash flow is directly influenced by your accounts receivable (money people owe you), accounts payable (money you owe people), and your inventory.


Managing Accounts Receivable

Remember, accounts receivable (AR) is the money a company or person owes you. If you fix someones' sink, you might give them an invoice that is payable within 30 days. Collecting on sales is a vital driver of the operating cycle and affects your businesses cash flow. If you make a sale, but don't collect cash on that sale for 120 days, you might be low on cash, which might affect your ability to pay your bills. It is vital to improve your collection of your accounts receivables.

How to improve your collection of receivables:

  • Send out invoices as soon as a sale is made or work is completed.

  • Make it simple for your customers to pay you via credit card, PayPal, or automated electronic payments to your bank account.

  • For bigger customers, do a credit check for new customers. Order a credit report to determine whether their credit history shows any risks.

  • Set limits for customer’s credit.

  • Print your credit terms on every invoice.

  • Be sure your terms are followed. Keep track of who owes you money, send payment reminders on a regular basis, act immediately if payments are overdue, and stick to your credit terms if late payments are overdue.

  • Offer discounts for early payment to encourage customers to pay quicker.

What to do if payments are late?

  • Get in touch with customer. By letter, then phone. See if there are any problems, if they are unhappy, etc.

  • Stop any current or future work/sales for the customer until balance is paid

  • Set up payment plan that will let the customer clear the debt over time

  • Last resort, use professional collection agency


Managing Accounts Payable

Accounts payable (AP) is the money you owe when you purchase supplies, goods, services, or other items. Often times, suppliers will allow you to purchase goods on credit, in which you have to pay back in 30 or 60 days. Managing your payables can directly help your cash position, especially if you are seeing fluctuations in your sales. 

How to manage your accounts payable:

  • Keep on eye on your spending. Buy only what you need, and if sales start to decrease you need to reduce your spending to avoid cash flow issues.

  • Research multiple suppliers and review payments terms for each. If you find a better deal, your current supplier might be willing to match it.

  • Try to negotiate time. If you cashflow is tight, ask for an extended time to pay (45 days instead of 30).

  • Be sure your terms begin when you receive the complete delivery, not partial.

  • Pay within the terms. Don't pay earlier that you need to, but don't pay later that you are supposed to. If you cannot pay by the due date, contact your supplier and arrange for a payment plan.

  • When dealing with large companies, ask about paying quarterly instead of monthly.


Managing Inventory

You always want to make sure you have enough inventory on hand to satisfy customer demand. Too little can upset your customers, and too much means that you just spent cash that you could have used to pay bills. You don't want excess inventory sitting on the shelf tying up cash flow. It is important to have just the right amount of inventory, according to your market demands.

How to better manage inventory:

  • Do a thorough review of your entire inventory. Determine what items are selling and what items are not, which items are providing the best profit and which items are not, etc.

  • Take action to move out older or excess inventory. This might mean giving discounts, selling them at costs or below costs, or even donating them. The point is to free up cash so you can invest in fast turning inventory.

  • Be aware of items that you must never run out of. These basic items that your customers demand should always be in stock.