Managing cash flow properly is vital for any business because insufficient cash is one of the most frequent reasons companies fail in the short-term. In essence, to avoid cash flow problems, you need to make sure you are receiving more money than you are spending, and that it's coming in on time. But you also need to know where the money is going to improve your cash flow management.
The Importance of Knowing Where Your Money Is Going
Your goal is to have a positive cash flow, which will allow you to have cash on hand at all times. This will give you negotiating power because most businesses will offer a discount to those companies that can pay quickly. It's also useful to have money available for any time-sensitive opportunities that might arise.
Having an accurate picture of where your money will help you cut any unnecessary costs. You need to make sure that all your expenses are necessary to running and expanding your business. For example, having sufficient inventory is essential to a retailer, but purchasing expensive office furniture is not.
You need to analyze your business expenses closely and slash costs where possible. The goal is to make sure receivables exceed accounts payable and other expenses.
Knowledge Is Power—Negotiating Power
Once you're aware of where your cash is going, you can look at negotiating with suppliers. If you work with certain suppliers on a regular basis, you might be able to negotiate better payment terms. Some companies will be willing to allow you to settle your bills in 60 or 90 days rather than 30. This can help a small business regulate cash flow because you can hold on to your money longer.
However, you must be careful because some suppliers might agree to extend your payment terms but will do so only if you agree to pay more. At first, it might seem like a good idea because you get an extra 30 or 60 days to pay your bills, but you must make sure that the higher costs don't negatively impact your profit margins.
Regulating cash flow properly is essential to your company's success, and having the right tools is essential. Instead of waiting for cash flow to become a problem, fix it now.