10 Strategies to Optimize Cash Flow Management for Your Small Business
Good cash flow management is crucial to grow, stay relevant, and have a successful business overall. You can use several strategies to keep cash flow open, and WaFd Bank is here to help. Read on to learn the many ways you can stay on top of your business's cash flow.
What is Cash Flow Management Strategy
It is how money moves into and out of your company. This includes ensuring invoices are paid as soon as possible, managing inventory efficiently, and generally managing short-term and long-term activities to keep money coming into your business so you can use it to run and grow your business. To do this, identify trends, seasonal dips, and spikes in sales or activity to predict and mitigate shortfalls. A good cash flow management strategy can also help you access financing later on so you can buy new equipment or meet other goals, in addition to potentially lower interest rates and more favorable borrowing terms.
How Do You Manage Cash Flow Effectively
Start with records, from customer feedback to historical sales information. This will help you determine your busy season and any unexpected spikes in sales (think about what events may be related to help you predict future spikes). Consider CollectEarly™ to streamline your invoice payment process; this service allows you to get paid in hours rather than weeks. In addition, you can take advantage of technology with treasury management solutions to help with cash forecasting and position monitoring, payments and collections management, risk management, reporting and compliance, integration, and cost efficiency. Work smarter, not harder, with WaFd Bank's suite of treasury management solutions.
How Can Cash Flow Be Improved
There are many different strategies to improve cash flow, each affecting cash flow in various ways. It's good to start as many as you can manage effectively to stay on top of the tasks needed to keep them going. If your team doesn't have capacity, consider looking into services that can help instead. Below are just a few ways you can improve cash flow.
- Optimize Accounts Receivable
Any invoice you send to customers should be paid promptly. Lowering accounts receivable is also known as decreasing liabilities. To reduce the amount of your accounts receivable, consider invoicing immediately after goods or services are delivered, set clear payment terms (deadlines and conditions), offer an incentive for early payment such as a discount, and follow up on overdue invoices. Regular reminders can help ensure timely payment. - Review Historical Trends
This includes past financial statements and records that can help you identify trends and patterns. This forms the foundation for understanding your company's cash flow and financial status. Take into account all of your business transactions and use that data for internal accounting, reporting, and forecasting of your cash flow needs. Tools like predictive modeling software can help you sift through those transactions, inform your cash flow strategy, and make better business decisions. - Forecasting
Future revenue and expenses can be predicted so you can get an idea of what your future cash flow might look like. This is done by analyzing market trends, historical sales information, and customer insights. Work with your staff, if applicable, to forecast sales volume and get a good pricing strategy in place. Remember to plan for various scenarios so you're as prepared as possible for any future fluctuations in activity or sales and can make informed decisions. Try categorizing expenses into fixed and variable costs (for example, rent and raw materials, respectively) to help you better understand future costs and plan accordingly for potential cost fluctuations. - Manage Inventory Efficiently
Too much inventory ties up cash that could be better used elsewhere. You can optimize your inventory using a just-in-time strategy where inventory is kept at a low level, and orders are filled as they are placed. Another approach is to look at which products are selling best and which are not to help avoid having too much inventory of certain products. - Negotiate with Suppliers
If you have a good relationship with your suppliers, leverage that for better payment terms. Negotiate for longer payment terms or ask for a bulk purchase discount. - Control Operating Expenses
Regularly (say, quarterly), look at your operating expenses and find areas where you can reduce costs. You might cut back on expenses or outsource tasks such as payroll. That can reduce workload and the amount you pay in wages and benefits. - Keep a Cash Reserve
This can help carry you through unexpectedly tough times. Your goal should be to have enough to cover three to six months of expenses to help your business stay afloat until times get better. - Utilize Technology for Accounts Receivable
There are multiple ways to do this, including sending invoices via email rather than mail for faster delivery and payment. There are also services such as CollectEarly™ that will help you collect payment even faster. Think hours, not weeks or months! You can also use tools and software to automatically track expenses and analyze trends for cash flow to provide current insights to help you make informed decisions. Whatever you decide, it's imperative to have a defined payment collection strategy with formal reminders and an escalation process for late payments. - Monitor the Economy
Every business is affected by economic trends in some way, some industries more than others, in ways that can impact your cash flow. Keep an eye on trends and change your strategies based on changing market conditions to capitalize on opportunities and lower risks. - Review and Adjust Your Budget Annually
Managing your cash flow is an ongoing process. At a minimum, review your budget and strategy every year and adjust as needed based on changes in the economy, the growth of your business, and the results of your current strategy.
How to Effectively Forecast Cash Flow
This is a crucial financial management process, so it's important to get it right. Your strategy may change over time, so at least once a year, look at other ways you can adjust to keep it practical and effective. In addition, understand the cash conversion cycle optimization, a financial metric measuring how long it takes to turn inventory or other resources into cash from sales. This metric can help you improve inventory efficiency and general financial performance. If you can increase inventory efficiency, that's going to help your cash flow because it frees up additional cash flow since your money isn't sitting in inventory that may not be moving as well as you'd like.
As often as possible, compare the forecasts you've created with actual results so you can see how accurate your forecasting is and make adjustments where needed. This will help ensure you have clear insights into where goals are being missed, met, or exceeded. Your ultimate goal here is to improve reliability of forecasts so you can plan even better for the future and make informed decisions. As you adjust requirements to run your business, pay attention to seasonal or cyclical patterns so you can invest in growth and avoid running low on cash at critical times, like during the holiday shopping season.
WaFd Bank is Here to Help
Whether your small business is looking for a better way to manage finances, pay employees, or deposit checks, our local small business bankers have the community knowledge and business experience to help. Check out ourbusiness services and treasury management solutions to see all the ways we help businesses run as efficiently as possible. Find your local WaFd Bank branch to learn more, or open a business bank account online today.
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