Cash flow management is one of the most important tasks small business owners need to pay attention to. If you are not paying attention to how your business generates and spends cash you may end up in real trouble, real fast. Cash flow management touches many parts of business, including inventory management, accounts payable, accounts receivable and so on. Below we provide you with insights that will help manage your cash flow better.
The first step to managing your company’s cash flow is to determine the cash conversion cycle. This is done by calculating how long funds spent on the business translate into funds made by the business – how long the resources spent on inventory or production turn into cash. This cycle completes once your company collects on your accounts receivable (what you are owed by customers) and settles your accounts payable (what is owed to vendors). If you can determine how many days your cash conversion cycle takes, you should be able to find ways to speed it up. A shorter cycle means real cash faster.
One way to do this is to keep strict accounts receivables policies. You want cash coming in faster than cash going out. This means sending out invoices as soon as you can, not sending out merchandise until it’s been paid for, and charging late fees when customers don’t meet their obligations on time. Also, be sure to send notices out by phone, email, or snail mail to customers that have outstanding balances. Once you’ve built up some long-term clientele, you might want to create an aging report. This report allows you to track payment patterns, so you can anticipate who might need some payment reminders.
You should have a specific accounts payable strategy as well. The idea is to pay your debt slower than debts are paid to you. Don’t pay your vendor bills until the due dates, and try to find flexible payment plans. As long as you don’t become delinquent, you won’t hurt your company’s credit score. Electronic transfers at the bank will help you avoid late payments and sending out money unnecessarily early.
A lot of businesses will have most of their money invested in raw materials and work in process. Managing inventory information can be complicated without good inventory management software. There are plenty of different software options online that monitor orders and shipments as well as analyze inventory. Also, stay informed by reading business self-help websites and cash flow books. Having this information will help you make smart decisions about what products and strategies are making you money, and what you no longer need.
Once you have learned to manage your company’s cash flow and found good inventory management software, you will be able to run your small business smoothly and successfully.
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