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Despite what one may think, cash flow problems can and do arise within even the most profitable and successful companies. Smoothly-run finances, operations and investing activities are a must to ensure CFOs and finance professionals alike do not waste valuable time diffusing the proliferating consequences of mismanagement when time could be better spent on meeting forward-looking objectives. By taking full control of expenses and optimising profits with the following eight tips and the right ERP financial management software, it is possible to reap the benefits of an improved business cash flow.
- Be strict with account terms.
First and foremost, you must have a strong grasp of your accounts and any overdue payments. Managing debtors well and having good credit policies will ensure that a steady stream of cash flows in. Keep details in mind like how quickly you send out invoices; the faster you send out an invoice, the faster you’ll get paid.
- Negotiate with your suppliers.
If you can negotiate longer payment terms with your suppliers, a decreased out of pocket cost may result. This will allow you to collect payments from customers before you pay your suppliers, keeping the cash flow in your favour. Essentially, try to propose and implement a payment schedule which balances customer terms and supplier terms. Although not all vendors may agree to it, 60-90 days is generally a good amount of time to ask suppliers for.
- Create a cash flow forecast.
Forecasts are extremely helpful for businesses to highlight cycles and predict cash flow on a monthly and yearly basis. Having forecasting information available at the ready means you can spread out big purchases and investments without significantly affecting cash flows. Using ERP tools such as financial planning software helps your organisation get the most out of your forecasting needs in an efficient and convenient way.
- Segment your customers, suppliers and inventory.
Attempting to approach and organise a business’ cash flow as a whole is not an easy feat. Segmenting different elements of your business process allows you to carefully analyse what exactly is occurring within each section and tackle each part one by one. For example, when looking at your customers, you must consider who your key customers are and how important they are to the business.
- Create incentives/penalties for early/late payments.
Invoicing can be a complicated and time-consuming back-and-forth endeavour, and it may take some extra effort to keep your clients accountable. There are several ways you can instil both incentives and penalties to encourage people to make payments the way you want them to. For example, you could apply discounts to early or on-time payments, and interest could be added to any late invoices.
- Reduce overheads.
This may seem obvious, but overhead costs contribute to a big chunk of money leaving the business consistently and there are measures you can put into place to soften this blow. Consider reducing overtime staff or minimising utility use, as long as you clearly explain these changes to your staff. You’ll notice a positive effect on your cash flow right away, allowing you to spend on other more crucial investments.
- Require deposits on large orders.
For special or large orders/services, require a deposit to lock in the purchase and improve cash flow quickly. Without insisting on a deposit, you could be risking accepting a reduced payment during time of delivery. Ensure that your customers understand your policy and require a minimum of 50% of the total price.
- Have a contingency plan.
Have a backup plan for when all else fails, just in case. Ensure you have a line of credit with your bank for emergencies and other possible pitfalls. Your business may be thriving and you may not expect anything to hinder it, but if there is no contingency plan to draw from, difficulties can arise. You can find a way to stabilise the ship and solve problems through crisis management, but this solution can be unpredictable and typically costlier than drawing from a contingency plan designed for a cash flow shortage.
Financial flexibility is important to any company and, using the strategies listed above as well as useful ERP tools, finance professionals can safeguard the financial health of their business by improving cash flow and reducing the likelihood of suffering financial dilemmas.