Cash flow is the movement of money in and out of a business during a specified period of time and helps capture an accurate picture of a company’s financial stability. Steady cash flow is crucial to the continued operation of any business and is often considered the most important financial statistic.
What factors can affect your cash flow?
There are many factors that can affect your cash flow, the first of which is account receivables. Money in this account is money that is owed to you and that should be coming into the business soon. There shouldn’t be a substantial gap between the time you get paid by a customer and the time you have to pay a supplier.
The second factor that could affect your cash flow is credit terms; how do you decide who receives 20 days and who receives 40 days? Customers with poor credit ratings may not be able to pay the money they owe you, so you should take this into account when deciding how many credit days to offer them.
The final factor is the economy; depending on how the economy – or your particular industry – is performing, businesses are bound to feel the effects. It is therefore crucial to keep your cash flow healthy for unexpected situations.
Five ways to improve your cash flow
Produce a cash flow forecast – No matter how big or small your business is, you have to understand the flow of money in and out of your business to be able to manage your cash flow well. This will let you know where it stands now and where it could go in the future.
Evaluate customer and supplier terms – When you make any deal, make sure you set out clear terms and conditions to avoid misunderstandings and strengthen your ability to collect payments later. It may help to understand your customers’ payment cycles so you can incorporate this into your credit control system.
Formalise and implement a proper credit policy – Credit checking customers in advance and continuing to monitor their payment afterwards is good practice; you may even decide to purchase a report before you decide whether to go into business with them. This will help you decide quickly how much credit to give to customers and how soon you should be chasing payments.
Manage stock well – Managing your stock well means that there won’t be obsolete stock sat on your shelves that could otherwise be cash. Keep track of your daily sales and the amount of stock that is held, identifying historical trends and areas for improvements. Remember that the more inventories you have, the less cash flow you have.
Cut costs and spread payments – Try not to purchase items until your business needs them and when you do, spread these payments over a period of time so there isn’t one large sum of money going out of the business at one time. Hire purchase and leasing can be used to fund equipment and vehicles.
Symptoms of cash flow problems
When your customers are taking longer to pay than usual, this is a sign that the business might be neglecting its credit control. This could lead to a build-up of excessive short-term debt in the company, meaning you have to rely on quick sources of finance. After a while there will be decreased liquidity within the company where you’re running low or out of working capital, making you unable to pay your day-to-day bills on time or at all.
So what does this mean for your business? More than anything, it means that you should make cash flow monitoring one of your top priorities because it can help ensure the financial stability of your business. Take into account the many factors that may affect your cash flow and take small but incremental steps to improve it before it’s too late.
If you find cash flow problems creeping into your business then don’t be afraid to ask for help or implement a good finance monitoring system.
This article comes courtesy of Experian, the global information services company.