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Cash Flow Best Practices for Business Leaders

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13 Cash Flow Best Practices for Business Leaders

Most business leaders understand the importance of sales and profit. However, as a business leader, it is essential to stay on top of cash flow best practices, to enable you to run your business/es efficiently and decrease debts. Even businesses with high profit margins can have low cash flow, which can lead to overspending and other financial problems.

The importance of Cash Flow Best Practices for Business Leaders

As a business leader, learning best practices for analysing and improving operational cash flow, will give you a leading edge. In addition, it will put your company on a more solid financial footing.

Cash Flow Best Practices

Here are 13 best practices for cash flow management, for business leaders, shared by members of the Forbes Finance Council.

1.Educate Yourself On Cash Flow And Its Impact

Cash is the oxygen of your business, and its’ inflows and outflows impact every decision you make. If you run out of cash, your business will stop—like a person will die without oxygen. Moreover, cash flow affects product pricing, customer payments, employee compensation, and more. Consequently, a solid grasp of this will help you grow a healthy business.

Join the free CoLAB Conquer Cash Flow webinar on Tuesday 26 October 2021 (more info to follow) to take your knowledge of cash flow one step further.  Click HERE to sign up for the webinar.

2.Look At Sales Versus Cash Flow

One lesson for business leaders is that more sales don’t always mean better cash flow. Because, as sales increase, expenses increase as well. Growing businesses often get strapped for cash even with strong sales. That’s when an injection of working capital can make all the difference.

3.Do A Weekly Cash Forecast

Make a habit of doing a weekly cash forecast, covering a quarter ahead, or approximately 13 weeks.  You will have much better control over your cash flow, and you can prioritize among activities generating both inflow and outflow. This will ensure that you’re not caught off guard from a cash flow perspective.

4.Keep Updating Your 13-Week Forecast

As mentioned above, business leaders are encouraged to create a 13-week cash forecast. Each week, update the forecast based on what happened the previous week and extend the forecast window by one more week. In this way, you can keep a close watch on exactly what’s coming in and going out so you can be more proactive in addressing potential cash challenges.

5.Variable Costs

Maintaining sufficient income is necessary for survival. However, increasing it is the key to growing your business. One way to mitigate risk is to reduce variable costs to reduce cash outflows. For example, if office rent is a significant cost, consider creating a hybrid working environment by letting staff work from home on certain days on a rotational basis. Thereby needed office space is reduced.

6.Use Your Cash Forecast To Identify When To Seek Financing

Cash flow is critical for obtaining financing and growing your business. By accurately managing inflow and outflow, business leaders can identify the right time to look for financing. When financing is required, look for innovative partners with responsible terms. This may not be a traditional bank or financial institution but instead a payment processor or other partner.

7.Develop Multiple Sales Channels

Over-reliance on one stream of income or cash flow can end up being a major risk to a business.  COVID emphasised this. Companies with diversified customer bases and multiple sales channels have much more enduring strength than those that are reliant on one large customer or channel.

8.Develop Projections For Multiple Scenarios

Knowing your numbers inside and out is essential. Cash flow can be quite turbulent for new businesses. Successful business owners find it helpful to develop financial projections for multiple scenarios. Revisiting projections regularly allows business leaders to better predict cash flow trends and helps them optimize cash flow management.

9.Use a Forecasting Tool

Consider using a cash flow forecasting tool. Many expenses are recurring or a flat percentage of revenue. Cash is king, and before you tie it up in additional inventory or unnecessary liability payments, use a forecasting tool to project your current cash on hand. This will enable you to make good decisions and decide whether you can afford a new capital purchase, or not.

CoLAB has a great, user-friendly cash flow tool for business leaders. Join the free Conquer Cash Flow webinar on Tuesday 26 October 2021, to learn more. Click HERE to sign up for the webinar.

10.Stay On Top Of Actual Expenses Versus Your Budget

Stay aware of company expenses and how they are tracking against a budget or forecast. Yes, spend more money to make more money— however, within a certain level of risk tolerance. Continuously monitor your loan availability or credit line, as it is a useful tool to grow your business. Growing too fast may require you to build inventory to meet higher demand. It is a cash flow trap that can seem counterintuitive.

11.Sync Accounts Payable And Accounts Receivable

Business leaders must understand what drives cash flow. This means properly syncing the payable and receivable sides of your business. If your business relies heavily on spending money to make money (such as through online marketing), then you have to make sure that your customers have a shorter “net” payable. Furthermore, with the understanding that if they pay you quicker, you can provide more products or services.

12.Be Aware Of Industry Trends On Receivables

The percentage of outstanding accounts receivable versus revenue billed is an important metric for staying on top of cash flow. Knowing your consistent trend and how it compares to industry standards will tell you how effectively you are converting billing into cash. A rising accounts receivable trend should be an immediate cause for concern and investigation.

13.Track Your Days Sales Outstanding

In typical business cycles, growth consumes cash, making it critical to understand Days Sales Outstanding. DSO is a metric that calculates the number of days that pass between a customer being billed and collecting their cash payment. It is an indicator of when cash will naturally flow into the company. Not understanding this metric has landed many entrepreneurs in a cash-strapped position, restricting growth.

CoLAB and Cash Flow Best Practices

CoLAB is hosting a free Conquer Cash Flow webinar on Tuesday 26 October 2021, 17:00-18:00, where you will discover the world of positive cash flow. Click HERE to sign up for the webinar.

Can’t wait for the webinar? Then click HERE to book a free 20-minute call with Barend Cronjé to chat about your questions and/or cash flow challenges.

To educate yourself on Cash Flow, read these popular CoLAB articles:

Growing a business broke

Business leaders don’t understand cash flow

Ways to improve cash flow 

The cash conversion cycle 

Other popular articles:

The real cost of a vacancy

Onboarding remote employees

Refresh your people structure 

The CoLAB group serves its’ clients through 3 specialist practices:

Profit Improvement 

Talent Placements 

Project Delivery 

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