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Cash flow management comprises a set of methods and procedures to help businesses track, analyze, and improve their financials
Fremont, CA: Cash flow management is essential for all businesses, but it’s vital for early startups. With healthy cash flow, they can pay their debts on time, sustain their operations, and grow their business. Without cash flow, companies are, in fact, only a few missteps away from financial ruin.
On a general note, cash flow management comprises a set of methods and procedures to help businesses track, analyze, and improve their financials. Cash flow management aims at getting businesses in the “green,” also known as positive cash flow, where they have more money coming in than going out.
In commerce and industry, cash is the king. Managing financials properly is essential to keep business afloat, but it's even more important if businesses have plans of growing and expanding their brand. In addition, it can help them predict and plan for cash shortages and surpluses.
Successful financial management includes balancing three elements: accounts receivable, accounts payable, and shortfalls. Simultaneously, it is important to ensure that one element doesn’t overtake the others.
Here are a few tips for effective cash flow management that help you grow your business.
Tips for Effective Cash Flow Management
Two main strategies help improve businesses’ cash flow: increasing incoming money and decreasing outgoing money. When there is a financial problem, some business owners rely on a credit card or opening a credit line. In fact, this is a bad idea. Here are some excellent ways small businesses can develop a healthier financial situation.
• Know your Breaking Point
Before companies can work towards a positive cash flow, they want to know how much they need to earn to break even. If they go over the break-even point, they are on the right path. If they fall short, then there’s an issue that needs to be addressed.
• Ensure Easy, Early Payments
An IOU from clients is virtually the same as not having money. Encourage customers to pay early—which will benefit businesses financially—by offering special deals or discounts if they pay ahead of time.
• Set Invoice Timelines and Terms
It’s necessary to document clear payment terms before taking on a new client or supplier. Make sure to lay out when payments for invoices are expected, whether it’s immediately upon invoice or within a few days not exceeding 60 days.
It is recommended to ask for an initial deposit for particularly resource-heavy projects so that businesses have some cash to cover inevitable expenses. Then, ask for the rest of the payment upon reaching certain milestones or deliverables.
• Have an Emergency Cash Reserve
Businesses should always have emergency cash reserves, which allow them some flexibility and security during downturns. A good rule of thumb is to have enough to cover at least three to six months’ worth of expenses.