A study done by U.S. Bank revealed that more than eighty percent of business failures are due to poor cash management. To ensure that your company beats these odds, it’s essential that you have a clear understanding of several key elements of proper cash management.
Create an Efficient Accounts Receivable Collection Process
At any one time, a significant portion of any business’s balance sheets will be tied up in receivables. You don’t have to have a background in finance to know that slow accounts receivable collection can cause a significant strain on business operations. The money you are owed can be in the receivables phase for months, especially if you’re managing a B2B company. This means that your business will have to manage with less cash on hand.
A clearly defined and strictly followed process can help ease the strain associated with collecting on receivables. First, invoices should be sent to customers as soon as goods or services are rendered, clearly indicating preferred method of payment, payment terms and due date. Second, late payments should be followed up on immediately and consistently. These simple practices can help speed the rate at which cash gets back into the business’s bank account. Good customer service and polite follow-up should not be forgotten, of course, in order to maintain positive relationships and repeat business.
Take Advantage of Payment Terms
As an entrepreneur, manager or student, you know the toll that late payments can take on a business. However, being a good corporate citizen doesn’t mean you have to pay your suppliers early. It might seem like you’re simply being organized and keeping suppliers balanced, but taking money out of your accounts before bills are due increases the likelihood of a cash flow issue. Taking advantage of payment terms and when bills are due can help keep money in your hands longer, preventing potential cash flow issues while your business may be waiting to get paid by others.
Keep Operating Expenses Under Control
Operating expenses can contribute to the depletion of financial reserves. Many businesses regularly evaluate their suppliers, but they don’t often think about how much they’re spending on other operating costs, including employee wages, payroll services, utility bills, and insurance costs. It’s important to shop around regularly to ensure you’re getting the best deal.
Further, experts suggest identifying your five largest expenses and looking for ways to reduce them each year. But how exactly can you do that? You may be able to reduce your operating expenses by implementing annual audits. Taking a look at existing contracts and seeing what can be amended is one way to attempt to lower costs; completing yearly employee reviews to identify underperformance or inefficient use of resources is another. Also, look at your supply chains to see if any steps can be eliminated. Small adjustments can add up and lead to positive change.
Have a Plan for Excess Cash
Effective business cash management is all about increasing the amount of money that comes into a business and minimizing the amount that goes out. However, that equation doesn’t tell the entire story. The final key to cash management is determining how to use excess funds. Excess cash may be used to pay down taxes, buy equipment, or help fund expansion efforts, to call out just a few examples.
It’s also important to recognize whether the excess cash will be required in the short-term, the mid-range, or the long-term. Unless there is an immediate need for the excess cash, the business could also invest it and make it work for them.
These are just a few essential elements to proper cash management. With a clear understanding of these basics, you’ll give your business a better chance at success.