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Cash Flow Tips
We often get calls from people who need help because of their cash flow – they have spent more than they’ve earned. Cash flow problems can cause a business to be unable to meet its financial obligations or, in the worst case, to fail. The same is true for individuals. Neither a business nor an individual can hope to be debt-free if income exceeds expenses month after month, so careful management of cash flow is essential.
Good management means having strategies in place that minimize the risk that problems will develop. Here are some guidelines that can quickly and inexpensively improve cash flow management for both businesses and individuals:
1. Pay bills on time but not early. The time before payment is due to a vendor is truly money in the bank. Pay all bills on time, but never early. Of course, if a business offers a discount for early repayment, you should take advantage of the opportunity to generate savings.
2. Keep inventories to a minimum. Inventories can be reduced by focusing on fast-turnover lines, cutting down on the number of items in stock, or negotiating with suppliers for faster replacement. Unsold stock represents money that’s doing nothing; monitor the age of everything in the inventory; wholesale your aged stock as quickly as possible. Only stock what you need.
The same principle applies to the “inventory” with which we supply our homes. Bulk buying household goods or foods is only cost effective if it’s for regularly used items. By all means shop for good deals, but don’t stockpile items that won’t be used within a couple months.
3. Reduce your repayment obligations. Your cash flow position can be improved, and a great deal of interest can be saved, by consolidating loans and/or credit cards into just one monthly repayment. Negotiating a single loan term can save most people more money than they realize.
Leasing equipment and/or vehicles instead of buying an often-overlooked option. Large-scale purchases tie up cash and, although leasing costs must be considered, you may be better off to acquire new equipment and vehicles through leases instead of buying.
Cash flow management guidelines that apply specifically to businesses include:
- Get invoices out promptly. Prepare invoices promptly and send them out on a regular basis. Customers are more prepared to pay a bill on time if it’s received immediately after they’ve received their goods or services.
- Speed up accounts receivable. Many customers will pay sooner if they’re given an incentive to do so. A discount for fast payments is a good reason for customers to pay quickly. Also, never extend credit unless there is ample evidence that the customer has the ability to pay what they owe and, if a job is especially substantial, ask for a deposit before proceeding.
- Pursue overdue accounts. Clients that don’t pay on time cost you money. The value of a client isn’t in what you bill, but in what you collect and how soon. Review your Receivables at least once a month. Establish a “Collections Call Schedule”. Be aggressive with customers whose accounts are overdue. If they stall despite your best efforts, exercise a businessman’s “tough love”: use a collection agency.
These are all simple but highly effective cash flow strategies. Post these rules, practice them, and watch how they contribute to improving cash flow management.
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