A Guide to Dealing with Inconsistent Cash Flow in Business

Cash Flow in Business

Kyla Nievera, Negosentro.comGood cash flow keeps your business alive and provides you with the funds that you can reinvest in your company’s development. Many companies are having troubles with cash flow, which can easily lead them to liquidation. Bad cash flow is the main reason why many businesses can’t make it past the first year.

Cash flow is the lifeblood of your business, and that’s why you need to unclog its channels and plug all the leaks. Every cash flow intervention is based on four simple principles:

  1. Get the money from your customers as soon as possible;
  2. Pay your bills just before the deadline;
  3. Manage your accounts efficiently;
  4. Always have a cash reserve on hand;

Cash flow analysis

It doesn’t matter whether you are running a multi-million dollar business or a lemonade stand, the best way to start dealing with the inconsistent cash flow is to conduct a thorough analysis of your sales and financial strategies. This analysis needs to determine the movement of your funds, the amount of cash you need to improve your flow and the set of practices that will make your business profitable and financially effective.

Some of these practices include:

1. Organizing your books

Inconsistent invoice numbering and improper records of customer payments can make you overlook the great number of invoices. By not charging proper sums from your clients, you might create problems with the company’s cash flow. Organizing your books can solve this issue. Bookkeeping can be very tricky, which is why you should hire professionals for this task, or at least purchase a reliable accounting software that will track your invoices and produce transparent monthly reports.

2. Relieve your business from bad debt

Bad debtors should be avoided at all costs. Unfortunately, most businesses are not able to choose their clients in the first phases of their development. New companies often grant great credit terms, which can drastically increase the number of bad debtors. You need to create a control system that will notify you about clients who missed their payment deadline. When tracking your debtors, you should be both ruthless and polite. Send them reminders, emails, letters and call them on a regular basis, but be polite above all. In the end, if you don’t manage to recollect your debt, you can hire a debt collection agency or sue your debtors.

3. Use invoice factoring

Invoice factoring is one of the most effective methods for improving your cash flow. There are companies that can buy off your unpaid invoices for cash, which you can reinvest in the development of your business operation. They will charge a modest fee for their services, and the best thing about this concept is that your clients don’t need to find out that you’ve sold their debt.

4. Eliminate profit problems

Some businesses simply don’t generate enough profits at the very start. Ultimately, there’s no business, which can suffer losses indefinitely, but your ability to shorten this period may be critical for company’s survival. Entrepreneurs who run businesses which require more time to stand on their feet, usually search for angel investors, who are ready to help their effort with cash injections, while receiving the part of company’s ownership in return. If you want to find a good investor, make sure that you master your presentation and communication skills and arm yourself with a well-written business plan.

5. Mitigate the consequences of quick growth

Businesses often grow too quickly. Small companies need to increase their costs when they start working on big projects. It sounds absurd, but no matter how lucrative the project can be, a large up-front investment can have drastic consequences on company’s cash flow. The best way to mitigate the consequences of a quick growth is to arrange a special deal with the local bank or a credit union. This way you’ll be able to take a short-term loan under much better conditions because banks are more willing to lend money to businesses that already have draft services contracts or letters of intent.

The best way for new businesses to mitigate the consequences of a slow cash flow or to avoid them all together is by crafting a realistic cash flow forecast. These forecasts are crafted by skillful accountants. Their purpose is to point out the deficit and the surplus months and to create an optimal spending plan. If these measures don’t bring the expected benefits, you’ll need to cut your costs and increase the competitiveness of your products and services.

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