You may have heard the saying, "cash is king". Cash is essential for any business to survive, and good cash management is essential if the business is to prosper and grow.
It doesn't matter what business you're in or how profitable it is, if you run out of cash, and are unable to borrow money, your business will cease to operate. Profit is not the same as cash. You can be very profitable, but at the same time be short of cash. If you can't pay your suppliers or employees then you will not remain in business for very long.
To remain viable, a business must maintain a positive cash flow, where the amount of money flowing into the bank account equals or exceeds the amount of money going out. Because positive cash flow is so important, many businesses will forecast their future cash requirements, enabling them to proactively take steps to avoid running out of cash.
Forecasting Cash Flow
Cash flow forecasting involves estimating cash inflows and outflows, and allows you to spot "negative cash flows" where the amount of money coming out of your bank account exceeds the amount going in. Such cash flow deficits can be addressed by increasing cash inflows, decreasing cash outflows, or obtaining short term financing such as a bank loan or a line of credit to fill in the gap.
Cash Flow Forecasting Models
A well-designed spreadsheet-based cash flow forecasting model greatly simplifies the process of forecasting an organization's cash flows. The model should permit you to enter an organization's planned cash receipts and expenditures for each future period, and automatically determine the bank balance at the end of each period. Any required draw downs or repayments of the line of credit should be automatically calculated. The forecasting model may also include a chart depicting cash inflows, outflows, line of credit available and line of credit utilized.
Arranging Financing to Cover Cash Flow Shortfalls
Despite best efforts to increase and accelerate cash receipts, and to reduce and defer expenditures, you may still have a requirement for short-term financing to cover off gaps in your cash flow.
Being proactive is important. Short-term financing should be negotiated before you require actually require the money. It is to your advantage to negotiate terms for a line of credit, or to arrange access to other short-term financing facilities, well before you need to draw on them.
It is helpful to build and maintain a good relationship with your banker. You should keep him informed of significant changes in your business that may affect cash flow, and of forecasted requirements for bank financing to fund the growth of your business.
Use a cash flow forecasting model to help you predict when and how much financing may be required. By demonstrating to the bank your ability to forecast accurately, you will establish greater credibility. The bank should perceive you as a lower risk borrower, and you should be able to negotiate more favorable lending terms.
Strategies to Improve Cash Flow
Methods of improving cash flow can be grouped into two broad categories:
Increasing / Accelerating Cash Receipts
Reducing / Deferring Expenditures
Increase prices of products and services
Negotiate discounts on purchases
Invoice promptly upon delivery of product or service, or if possible, in advance
Negotiate increase in credit from suppliers
Request deposits or multi-stage payments
Don't pay invoices until due date
Email invoices rather than mailing
Take advantage of payment via credit card where vendor allows
Change payment terms to "Payable upon Receipt"
Defer capital expenditures
Allow customers to deposit payment directly into your bank account, by providing EFT banking information on your invoice
Seek cost reductions upon renewal of service contracts with suppliers
Establish a systematic collections process, including regular follow-up of delinquent accounts
Consolidate bank accounts, use fewer banks, negotiate lower banking fees
Suspend credit on delinquent accounts (require payment up front until account is current)
Reduce inventory levels
Generate A/R aging reports & review regularly
Outsource payroll to third party provider (often beneficial even for a single employee organization)
Sell or donate surplus assets
Defer discretionary spending until sufficient cash is available
Invest idle funds
Review telecommunications bills to insure you are paying only for the services you require
Conclusion
Utilizing a good cash flow forecasting model, combined with the above cash management strategies, should result in improved profitability for your business, and greater credibility with lenders. More importantly, it will give you peace of mind, knowing that your organization's cash needs can be met.
It doesn't matter what business you're in or how profitable it is, if you run out of cash, and are unable to borrow money, your business will cease to operate. Profit is not the same as cash. You can be very profitable, but at the same time be short of cash. If you can't pay your suppliers or employees then you will not remain in business for very long.
To remain viable, a business must maintain a positive cash flow, where the amount of money flowing into the bank account equals or exceeds the amount of money going out. Because positive cash flow is so important, many businesses will forecast their future cash requirements, enabling them to proactively take steps to avoid running out of cash.
Forecasting Cash Flow
Cash flow forecasting involves estimating cash inflows and outflows, and allows you to spot "negative cash flows" where the amount of money coming out of your bank account exceeds the amount going in. Such cash flow deficits can be addressed by increasing cash inflows, decreasing cash outflows, or obtaining short term financing such as a bank loan or a line of credit to fill in the gap.
Cash Flow Forecasting Models
A well-designed spreadsheet-based cash flow forecasting model greatly simplifies the process of forecasting an organization's cash flows. The model should permit you to enter an organization's planned cash receipts and expenditures for each future period, and automatically determine the bank balance at the end of each period. Any required draw downs or repayments of the line of credit should be automatically calculated. The forecasting model may also include a chart depicting cash inflows, outflows, line of credit available and line of credit utilized.
Arranging Financing to Cover Cash Flow Shortfalls
Despite best efforts to increase and accelerate cash receipts, and to reduce and defer expenditures, you may still have a requirement for short-term financing to cover off gaps in your cash flow.
Being proactive is important. Short-term financing should be negotiated before you require actually require the money. It is to your advantage to negotiate terms for a line of credit, or to arrange access to other short-term financing facilities, well before you need to draw on them.
It is helpful to build and maintain a good relationship with your banker. You should keep him informed of significant changes in your business that may affect cash flow, and of forecasted requirements for bank financing to fund the growth of your business.
Use a cash flow forecasting model to help you predict when and how much financing may be required. By demonstrating to the bank your ability to forecast accurately, you will establish greater credibility. The bank should perceive you as a lower risk borrower, and you should be able to negotiate more favorable lending terms.
Strategies to Improve Cash Flow
Methods of improving cash flow can be grouped into two broad categories:
- Strategies to increase or accelerate cash receipts
- Strategies to reduce or defer expenditures
Increasing / Accelerating Cash Receipts
Reducing / Deferring Expenditures
Increase prices of products and services
Negotiate discounts on purchases
Invoice promptly upon delivery of product or service, or if possible, in advance
Negotiate increase in credit from suppliers
Request deposits or multi-stage payments
Don't pay invoices until due date
Email invoices rather than mailing
Take advantage of payment via credit card where vendor allows
Change payment terms to "Payable upon Receipt"
Defer capital expenditures
Allow customers to deposit payment directly into your bank account, by providing EFT banking information on your invoice
Seek cost reductions upon renewal of service contracts with suppliers
Establish a systematic collections process, including regular follow-up of delinquent accounts
Consolidate bank accounts, use fewer banks, negotiate lower banking fees
Suspend credit on delinquent accounts (require payment up front until account is current)
Reduce inventory levels
Generate A/R aging reports & review regularly
Outsource payroll to third party provider (often beneficial even for a single employee organization)
Sell or donate surplus assets
Defer discretionary spending until sufficient cash is available
Invest idle funds
Review telecommunications bills to insure you are paying only for the services you require
Conclusion
Utilizing a good cash flow forecasting model, combined with the above cash management strategies, should result in improved profitability for your business, and greater credibility with lenders. More importantly, it will give you peace of mind, knowing that your organization's cash needs can be met.
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