DECEMBER 9, 2022
Business

How to Fix and Maintain a Healthy Cash Flow

maintain healthy cash flow

How to fix and maintain a healthy cash flow

Healthy cash flow is essentially the lifeblood of any business. It refers to the steady movement of cash coming into and going out of your business. When we say cash flow is healthy, we mean that there’s always enough cash on hand to cover expenses, pay employees, invest in growth opportunities, and handle unexpected costs without the business running into financial trouble. Think of it as having a robust bank account that doesn’t just survive but thrives, allowing the business to operate smoothly.

Let me explain some basics about Cash Flows

Positive Cash Flow:

This type of cash flow shows that cash coming into your business by the sources of accounts receivable and sales is greater than the money going out of your business by way of monthly expenses and account payables. This type of cash flow is the target for all businesses.

Negative Cash Flow:

This type of cash flow is just the opposite where going out of the business is greater than your expenses and account payables. This cash flow is discouraged and means trouble for the business. This position blocks all the routes to growth & success. 

However, there are multiple ways any business with negative cash flow can fix this stage & turn their cash flow into upward direction. Here are some of the methods described below to keep you safe as well as bring you out of negative cash flow.

Best Practices to Manage Healthy Cash Flow

Regular review of you financial statements:

To maintain healthy cash flow, the first step is to keep a close eye on it. This means regularly reviewing your cash flow statements, which detail the cash coming in from sales and the cash going out to cover expenses. It’s like checking your personal bank account regularly to ensure you’re not spending more than you’re earning. 

Forecasting future cash flows:

Forecasting is another crucial part of this process. By predicting future cash flow and risks based on past data and upcoming expenses and revenues, you can anticipate when you might run into a cash crunch and plan accordingly. This proactive approach allows you to make informed decisions rather than reacting to crises as they arise.

Optimizing Receivables:

Another key aspect of managing cash flow is optimizing your receivables. This means you must ensure that your invoices are timely paid by your customers. One way to do this is by sending out invoices promptly and setting clear payment terms, such as requiring payment within 30 days. If customers are slow to pay, following up promptly can make a big difference. Sometimes, offering small discounts for early payments can incentivize customers to pay sooner. Additionally, it’s wise to conduct credit checks on new customers to ensure they have a good track record of paying their bills. 

Managing Payables:

Managing your payables is equally important as receivables. This involves negotiating longer payment terms with your suppliers, so you’re not always scrambling to pay bills as soon as they arrive. This way, you can align your outgoing payments more closely with your incoming cash. Spreading out payment dates to avoid lump-sum outflows can help maintain a more consistent cash balance. Also, taking advantage of early payment discounts offered by suppliers can also save you money, though it’s a balancing act to ensure it doesn’t strain your cash flow. 

Budgeting the expenses:

Controlling expenses is another critical area. Sticking to a well-planned budget helps you avoid unnecessary spending. Basis on your regular review of your expenses can help you to identify areas where you can cut costs without compromising quality. For instance, budgeting your new & older subscriptions or services cost as per changing requirement. Moving as per your budget ensures that more of your revenue remains in the business, minimizes financial shock and enhances your cash flow.

Maintaining Optimum Inventory:

Managing inventory wisely can significantly impact cash flow. Holding excess inventory will tie up cash that could have been used in other areas. Adopting a just-in-time inventory system, where you maintain stock only as they are needed, can cause you trouble when there are bulk orders. However, to reduce holding costs and free up cash a business must identify a buffer inventory quantity that does not tie up too much cash and neither it causes a shortfall to meet the requirement. This approach needs careful planning but can be very effective in maintaining a healthy cash balance.

Effective Sales Strategy:

Increasing revenue is, of course, a direct way to improve cash flow. Implementing effective sales strategies, running marketing campaigns, and exploring new markets can boost your income. Diversifying your product or service offerings can also create additional revenue streams, providing a buffer if one area of the business experiences a downturn.

Maintaining balance between cash reserve & line of credit:

Maintaining a cash reserve is like safeguarding your business. Setting aside money for emergencies or unexpected expenses ensures that you have liquidity when you need it most. Keeping a line of credit open with your bank can provide a quick source of cash to cover temporary shortfalls. Thus, it’s important to maintain a combination of them in order to maintain your credibility, routine expenses and emergencies. 

 

Best Practices to Fix Your Negative Cash Flow

Speed-up receivables recovery:

It is essential to recover your receivables within a shortest span of time. You may start by changing invoicing frequency. You may generate invoices immediately when goods/services are delivered rather than waiting till the end of the month. Another step you can take is to take advance or deposit before you deliver. And most importantly, keep regular follow ups on receiving your payments. You can also  offer small discounts for early payments that can incentivize customers to pay sooner.

Liquidate tied up cash in the inventory/assets:

If there are machines or equipment that is now obsolete, then you may consider selling them off and generating cash for your business. If you have excess inventory which will not be used in your 2 to 3 cycles, then you may liquidate your cash out of this. It will help you to improve your present situation and make you stronger for the future.

Short and long term Financing:

You can ask your bank to provide a short term line of credit which can be used during emergencies or to support your regular cash inflow & outflows. Whereas, long term financing can support your business in long term growth for equipment, real estate, technological development etc. Also, the cost of long term financing will spread across many years while you achieve growth as well as managed working capital.

Delaying payables:

You must reach out to your suppliers and negotiate how you can delay the payment, obviously without any late payment charges. Usually when there is negative cash flow, businesses in general try to first clear out the payables, which should not be the case. It is better to have longer payment terms and also spread across different dates to avoid burden and retain more cash.

Professional Advice:

Finally, seeking professional advice from accountants or financial advisors can provide tailored strategies for maintaining a healthy cash flow. These professionals can offer insights based on their experience and knowledge, helping you make better financial decisions and avoid common pitfalls.

In the final thought, maintaining a healthy cash flow involves a combination of regular monitoring, proactive management, efficient handling of receivables and payables, controlling expenses, wise inventory management and boosting revenue. Also seeking professional advice will always be an added advantage while managing cash flow. By staying on top of these areas, you can ensure that your business remains financially healthy and resilient, ready to grow and thrive in any economic environment.

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