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Cash flow management

For fast-growing businesses, seasonal businesses, and businesses that may be cyclical, cash flow management is a critical skill business owners need to know. Here are 5 important cash flow management tips:

1. Use Cash Flow Management Tools

A cash flow forecast is a living spreadsheet that allows you to keep track of cash flow on a weekly or monthly basis. For ongoing businesses, a weekly cash flow forecast is recommended. There is a bit of a learning curve but the time spent learning how to forecast inflows and outflows of cash is worth it. When writing a business plan, a monthly forecast is adequate, but when your business is growing very rapidly or you have seasonal sales, using a 13-week cash flow forecast is best. Once a week take time to enter your estimated cash inflow, balance the prior week’s estimates, and estimate next week’s. While you might not be able to forecast all inflows and expenses over the 13 weeks, but you might be surprised to see you know about cash inflows and outflows pretty far in advance. Here is a great cash flow forecast template you can download for free.

2. Speed Up Your Cash Inflows

Cash inflows are moneys that come into your business, usually through money owed to you. If you are a B2B company, your accounts receivable is where you can speed up inflows of cash. Getting down payments against work you haven’t completed is one example of ways to speed up cash flow. Another is offering discounts for prompt pay. Finally, stay on top of your accounts receivable collection. This is probably the most important cash flow management technique.

3. Decrease Speed in Which Cash Flows Out of Your Business

If you can arrange terms with your trade vendors, this is one of the best ways to slow down outflows of cash. Try to match your vendor terms with the terms you give your customers. Scheduling regular payments to pay at the last possible date due is another good cash flow management tool. Many large businesses like Walmart use trade credit to manage their own cash flow. Vendors to large companies may have to wait 15-45 days beyond terms to be paid, but don’t do that often with your trade vendors. Walmart may get away with it, but small and mid-sized businesses will only get hurt if they stretch their accounts payment very far past the due date.

4. Inject Cash into Your Company

A loan or equity investment into your company gives you more cash to operate. The best type of loans for cash flow management are short-term loans. There is a financing principal that says your least expensive loans are ones that match short-term assets such as accounts receivable or inventory with short-term loans. Conversely, it is wise to use long-term debt (greater than 12 month payback) for financing long-term assets like real estate or equipment.

5. Borrow Against Your Accounts Receivable or Inventory

Accounts receivable loans and invoice factoring loans are not hard to get if you are a B2B company. Loans against inventory are a bit harder but are available. Loans against purchase orders are also a reasonable alternative if you have a large order and need to finance raw materials or finished goods to fulfill the purchase order. Often it makes sense to use multiple types of financing to meet your company’s needs. Many companies consider this the best way cash flow management tool available.

Cash flow management takes a little discipline to start, but once you realize how valuable it is to your company’s well-being, you will be glad you started it and you aren’t likely to stop.

About Sam Thacker

Sam Thacker is a partner in Austin, Texas-based Business Finance Solutions. Since 1994 he has been in the banking and finance industry as a commercial lending officer, banking consultant, and advocate for small business financing. He has originated over $400 million in loans to hundreds of businesses across many industries. Sam is a nationally respected working capital finance professional, speaker, and writer. In addition to helping small companies obtain working capital financing using a variety of assets, Since 2007, Sam has written over 500 published columns and articles around finance topics of interest to small business owners. He writes about the challenges of small business finance, accounting, and best business practices. Sam also teaches classes to trade associations and other groups. He has been praised by readers and class attendees in programs he teaches for his ability to explain complicated financial concepts in easy to understand terms.

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