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.
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.
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.
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
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