Cash flow is the real-time record of money made as profits and used as expenses to run an organization. It represents the cash a business receives from sales, debtors, bills receivables, and the cash it spends on expenses like salaries, operational tasks, and payments to creditors. Having a consistently positive cash flow indicates that a business is performing optimally compared to its rivals. There are many proven strategies to boost a company’s cash flow.
Focus on cost-cutting
One of the most straightforward cash flow management techniques is reducing the outflow of money. Initially, businesses need to review their balance sheets to track all their annual expenses. This review will pave the path for them to get rid of removable liabilities by selling off underperforming assets, liquidating goods that are not moving quickly (even if they must price them at a discount), reviewing the supply chain and making it more efficient, reducing overtime and laying off non-essential staff members, cutting down on the marketing budget, and moving IT resources from on-premise software to cloud-based solutions.
Consistently making these changes, the organization will see an improvement in the cash flow, maintaining the monetary reserves of the businesses over a period of time.
Conduct credit checks for clients
Many clients prefer to make credit payments instead of on-spot cash payments in exchange for a company’s products or services. Before getting into a partnership with such clients, businesses must check their creditworthiness. A client with a poor credit score is likely to frequently delay payments. Over time, receiving late payments can affect a company’s cash flow. This is why businesses must prioritize receiving payments on time over selling their products or services to clients with poor credit scores. Even if a company opts to enter into a business exchange with clients with poor credit history, they should consider increasing their interest rates for the receivable installments.
Performing regular credit checks may take time and lead to additional expenditure, but it is known to be a useful exercise in handling cash flow issues in businesses.
Reduce one’s capital needs with better cash flow forecasts
Reducing the amount of capital a business uses for operations helps to consolidate its cash flows. Freeing up capital use is known to release cash and enhance an organization’s market value. A nifty way to reduce to do this is by lowering one’s inventory carrying costs. Businesses can ensure this by improving their delivery speed and, thereby, reducing the amount of tied-up capital (raw materials, unfinished goods, and finished products) in their warehouses. Another technique to achieve the same objective involves reducing payment terms for clients and extending supplier payments at every possible juncture.
Finally, certain assets such as specialized tools, costly facilities, and heavy machinery absorb a lot of cash. To reduce reliance on such entities, businesses can consider financing equipment or real estate through capital sources such as lines of credit, SBA loans, and corporate leases.
Incentivize early payments from clients
For managing business cash flow effectively, an organization needs to ensure that the pending money is received at the earliest possible. Companies can offer discounts to customers who consistently pay sooner than net 30 days for their purchases. An example of this is providing upfront discounts of 10% to clients if they pay up within 10 days of using a given company’s products or services. Doing so does slightly decreases a company’s incoming revenue, but, over time, it is known to boost its overall cash flows based on the number of on-time payments made by clients.
On the flip side, companies also need to penalize late payments. Information about the penalty must be specified on the payment invoices provided to clients once the transaction takes place. Companies need to levy penalties for every additional month taken to make a pending payment.
Leverage data analytics for insights
Major organizations today rely on Enterprise Management Systems (EMS) and advanced data analytics to not only keep track of real-time cash flows but also gain actionable insights related to cash flow trends and other performance metrics. Data is arguably the biggest resource of any business in today’s digitized times. This is why, data-driven decision-making enables businesses to proactively identify opportunities and mitigate possible risks.
For example, data analytics tools can be trained to look into the revenue index of clients to pinpoint which ones are most profitable at any given moment. Knowing this information enables businesses to focus their sales efforts on such high-value clients and make the most of their healthy finances. In this way, leveraging data analytics contributes to improving cash flow for entrepreneurs.
Automate financial processes
When a business conducts several transactions daily, it can get challenging for accountants and cash flow managers to keep track of payments and other financial processes. To assist them and eliminate human error, businesses can automate tasks such as manually entering data, paying and receiving bills, and processing invoices. Accounting automation lets businesses streamline these repetitive processes and improve cash flows through time savings and enhanced financial accuracy.
Provide multiple payment channels
Cash flow management is all about businesses increasing the number of gateways from which they let in liquidity. Today, there are numerous ways to make payments. Businesses need to honor buyer payment preferences by opening up more payment channels. Examples of this are opening up automated credit card acceptance, setting up ways to receive UPI payments, and facilitating automated AR processes.