Are You Doing All You Can To Maintain A Healthy Cash Flow?

Cash crunches are a frequent cause of business failure, while a healthy cash flow lets a business thrive and grow.

Any business owner who has fended off calls from unpaid creditors or who has wondered how to meet the next payroll knows the importance of cash flow.  Ironically, business success and cash shortages often go together.  If growing sales are on credit, they create a larger accounts receivable which your company is funding.  Your income statement may show a hefty profit, but profit doesn’t pay the bills – cash does! That’s why understanding and controlling the cash flow in your business is so important.

There are three elements to cash flow management: Collecting cash as fast as is reasonable, paying out cash as slowly as is sensible, and making the best use of cash held in your business.

Use this checklist to see if you’re doing all you can to maintain a healthy cash flow in your company.


Speed Cash Collection

  • Speed cash collections by invoicing customers when you ship the goods or provide a service, not a few days or weeks later.
  • Make sure invoices clearly show the payment due date and the penalty, if any, for late payment.
  • Even better than invoicing customers, arrange for payment when the product is delivered.
  • For jobs that take a long time to complete, bill the customer in stages.
  • Consider offering customers a discount for early payment.
  • Review your credit and collection policies, and tighten them if you find you have too many late payers or overdue accounts.
  • Follow up promptly and in person on disputed bills or delinquent accounts.

 Manage Cash Outflows

  • Delay payment to your suppliers and other vendors until the latest date which still allows you to take advantage of discounts.
  • Pay only the minimum estimated income tax payments needed to avoid penalties.
  • If you have employees who travel, consider using credit cards instead of cash advances.
  • Age your accounts payable every month. This schedule will show how much you owe, to whom you owe it, and the age of each debt.  With it, you can quickly identify cash flow problems, mounting interest charges, and possible billing errors.

 Use Cash Wisely

  • Open all mail immediately and deposit checks daily.
  • Keep in your checking account only the amount of cash needed to clear outstanding checks. All other idle funds should be placed in an interest-bearing account or invested.
  • Forecast your cash needs regularly to avoid costly last-minute borrowing.
  • Establish a business line of credit before you need it.
  • Use a report called the “statement of cash flows” to monitor your business cash and track the relationship between cash and profits. This statement records the changes in cash from period to period and helps you see what cash is available for operations, expansion, or investment.

 Practice Cost Control

  • Periodically conduct a competitive review of suppliers, and select those who can deliver good quality and service at the lowest cost.
  • Negotiate with your suppliers for the most favorable terms you can get. If you’re a good customer with a good payment record, you may be able to negotiate a bigger discount or a longer payment period.
  • Continually review your operation for cost-cutting efficiencies.  Control costs all the time – even when business is good and cash flow is strong.
  • Enlist the help of employees in controlling costs.  Provide rewards for the best suggestions.
  • Consider outsourcing certain activities that either consume a great deal of time and resources or are prone to errors.  For example, you may be able to have payroll processing done by a vendor at a fraction of the current cost to you.
  • Watch inventory levels. Identify slow-selling items and high-priced items. If you must continue carrying them, consider making them special order items.
  • Maintain just enough inventory to meet customer demand without buying more than necessary.
  • Look for suppliers who deliver quickly so you can wait longer before reordering. Pay attention to turnover ratios and inventory backlogs when deciding when and how much to order.
  • Sell obsolete inventory that is taking up space, and donate what can’t be sold.
  • If you occupy expensive space, consider moving to a less costly location that will not mean losing clients or business.