We are all so romantic about business, ideas, creativity, products… But how often do we think about cash management? Here are some tips I have learned (the hard way) to manage working capital.
It’s a challenge for even the biggest firms: sustain working capital and manage the flow of cash through the business. But there are ways to ensure that the operation makes the best use of its cash-on-hand. These combine cash flow budgeting and/or the use of financial resources outside the company.
Managing your working capital
Your level of working capital is intimately related to the flow of cash into and out of your business. Simply stated, you need enough working capital to setup the business, pay operating costs, and continue to operate until payment arrives 30, 60 or maybe even 90 days later. But if you’ve used a lot of that working capital to pay for fixed assets, you may find you cannot pay suppliers, buy materials or even pay your salary ;-) It’s wise to maintain a level of working capital that allows you to make it through all these and operate the business.Short-term financing can be used to make emergency purchases or to bridge the gap between month’s-end payables and receivables. It can be negotiated with your financial institution, but should be done before the need arises.
Make a cash flow budget. Your bookkeeper, accountant, accounting software and even spreadsheets downloadable from the Internet can help you anticipate inflows and outflows of money over a period of time. Budgeting allows you to see when a cash crash is likely to occur.
Manage the business risks
You need to consider a number of scenarios such as “What if that big order comes in?”, “What if that big order is cancelled?” or “What if that important client goes under owing me money?” This kind of risk analysis can become part of your cash-flow budgeting process. For instance, if you’re using a spreadsheet to enter cash inflows, reflect that situation by adding or deleting. The repercussions in the weeks and months to come should be immediately visible.
The benefits of new clients
You can reduce the risk of a cash crash due to client over-dependence by planning ahead and having a more diversified client base. If you’re not dependent on one large order or client, your livelihood doesn’t hinge on the health of someone else’s business. Finding new clients will increase revenue, improve your cash flow situation and make you less susceptible to marketplace adversity.
Collect quickly!
To guard against late payments, bill as early as possible and make those invoices as clear and as detailed as possible. It may also be worth changing other billing practices such as invoice frequency: instead of waiting until the end of the month, generate an invoice as soon as the goods or services are delivered.
For big orders, consider progressive invoicing while you deliver the service. For example you can ask for a deposit with the order and then a percentage of the payment at various milestones.
Keep track of your receivables
It’s easy to lose track and then neglect to follow up on an overdue account. Experience shows that the longer you remain out of contact with a customer, the less likely you are to recover the full amount owed.
Monitor costs and inventory
Make sure you’re getting the best possible deal from your suppliers. You can do this by shopping around and getting quotes from other suppliers. They may not be able to give a better price, but may be able to offer better payment terms making it easier on your cash flow situation.
Analyze inventory turnover to determine which items are selling and which are soaking up working capital. Try to keep inventory levels lean so that your working capital isn’t tied-up unproductively.
There we go, some simple actions that could make a world of difference!
