Key Principles of Cash Management

Large corporations understand the importance of putting their cash to work as an asset to maximize financial efficiency. This can only be achieved by following time-tested principles for optimizing cash management. By incorporating these principles, large corporations and SMBs can efficiently manage their cash flow and achieve greater financial stability and growth.

Speed Up Collection of Receivables

Receivables refer to completed sales for which payment has not been received yet. Businesses often sell goods on credit with credit terms varying from 30 to 90 days, sometimes extending up to 120 days. For efficient cash management, timely and predictable cash inflows are crucial. Companies should aim to shorten their revenue collection period and implement effective follow-up mechanisms to collect outstanding payments faster. 

Offering early payment discounts and incentives to customers can significantly improve cash flow. Even a small incentive, like a 2% discount, can motivate clients to settle their bills sooner. Your accounts receivable team should act promptly on late payments and reevaluate underperforming contracts to maintain a healthy cash flow. 

Payables Management

The primary purpose of effective cash flow management is to ensure timely payment of vendor invoices and other expenses to external parties. Payables are debts owed by businesses to third parties, and managing them helps maintain an optimal cash balance to meet payment deadlines. Therefore, companies need to regularly assess their ability to meet current debt obligations, which requires careful planning of cash outflows. By strategically timing these payments, you can preserve the liquidity of your company while retaining sufficient cash reserves to explore other investment opportunities.

Cost Cutting

In times of economic downturn, small firms often adopt cost-cutting measures to survive. One straightforward approach to improve cash flow is to reduce investments in non-essential areas, although this might limit the company’s potential for growth. The owner’s attitude towards risk and reward will determine whether this short-term gain is worth the longer-term sacrifice.
During economic slowdowns, businesses typically cut back on recruitment, advertising, pay increases, and large investments in property and machinery. Leasing expensive equipment instead of purchasing it outright and exploring finance schemes provided by trade suppliers can help manage upfront costs.
Moreover, reviewing stock levels and seeking sale or return deals with new suppliers can minimize cash tied up in inventory. Plus, negotiating with existing creditors to modify repayment terms is another option.

Cash flow Forecasting

Creating a cash flow forecast is vital for businesses. You can use Excel or suitable accounting software to help in the process. By reviewing your bank statement, you can track outstanding cheques and unpaid invoices from customers and trade creditors. It’s wise to plot all inflows and outflows over an extended period, including direct debits, standing orders, rent, loan repayments, and wages. Record all transactions with dates and opening and closing bank balances.
The further ahead you project in your calculations, the clearer the peaks and troughs in your cash flow forecast become. For seasonal businesses, it’s crucial to calculate the cash needed during high seasons to sustain operations during the low seasons.

Use Advanced Technology

You have the option to leverage accounts receivable and other cash management tools for automating your cash management procedures. Embrace the power of technology with a wide range of tools and cloud-based services tailored specifically for small businesses, such as QuickBooks, Upflow, Zoho, and more. These cutting-edge solutions are designed to simplify various account management tasks and enable you to stay organized, efficient, and focused on growing your business. With these innovative tools at your disposal, you can optimize your cash flow management, reduce manual workloads, and ensure a smooth financial operation for your company.

Plan for the Unexpected

Always have a contingency plan in place to prepare for unforeseen circumstances that could lead to a cash flow crisis. Having a well-thought-out backup plan, including a reserve of cash, will provide you with peace of mind in case of a worst-case scenario.

By having a well-thought-out backup plan in place, you create a safety net that instills confidence and peace of mind. While you cannot predict every twist and turn that lies ahead, having a contingency plan empowers you to navigate through challenging times with resilience and agility.

Grow Steadily

Expanding rapidly poses cash flow risks and can lead to financial shortages. As you scale up your sales efforts, initial investments are required. If the time gap between these increased expenses and the subsequent rise in sales is prolonged, it may impact your future cash flow, potentially causing challenges for your business.