Cash is the lifeblood of all businesses and without it, even the most successful of enterprises are bound to collapse. This is why cash flow plays such a vital role in enterprise financial management.
Failing to maintain a healthy flow of cash into a business inhibits its ability to purchase additional stock and pay employees and utilities. Oftentimes, many hapless business owners make the mistake of overextending themselves which ties up cash unnecessarily.
The COVID-19 pandemic has brought the global economy to its knees as a result of widespread mandatory shutdowns and quarantines. In the United States alone, more than 20 million Americans have been left unemployed with the number expected to climb as an increasing number of businesses begin shutting down.
This situation highlights a clear vulnerability that has long been ignored – the availability of cash buffers or reserves. While the effects of the COVID-19 pandemic have been devastating, the inability of businesses to stay afloat is a worrisome one.
Whether you’re a new business owner or an experienced entrepreneur, one thing remains certain; maintaining healthy cash flow is essential to success.
Here, we’ve put together a guide on how you can better manage your cash flow.
1. Follow Up On Debts
On paper, a business may appear to be profitable with high profits and consistent revenue streams but it could still be in a financially infeasible position. One of the main reasons behind this could be linked back to the lack of control in the accounts receivable department.
Accounts receivable refers to payments from customers/clients that are owed to the business. When customers purchase goods or receive services on a credit basis, the amount owed i.e. debt has to be collected within a specified amount of time.
Most business owners make the mistake of overlooking this aspect of their business and instead preferring to focus on developing new business or attracting new clients.
Allowing debtors to drag payments for longer than agreed upon starves the business of much-needed cash and if left uncontrolled can be extremely detrimental to the enterprise’s financial wellbeing.
As a rule of thumb, accounts receivable should not be allowed to age past 30 days.
Investing in a basic accounting system allows even the most financially illiterate of entrepreneurs to keep track of debts owed with minimal fuss. Some businesses also offer customers a 1% discount on the total sum owed for payments received before the 30-day period as an incentive to make payments earlier.
2. Optimize Operating Costs
If the coronavirus outbreak has shown us one thing, it’s the fact that most businesses are now able to function remotely. The need to practice social distancing and continued lockdowns have forced even the most conservative of business owners to allow employees to work remotely.
Cost management has become increasingly important as businesses struggle to cope with falling profits. Even the top teams in sports franchises, such as basketball teams from NBA betting line, had to cut on their staff.
As a business owner, it may in fact be prudent to allow employees to work entirely from home for the foreseeable future.
Besides reducing the risk of infection, remote working allows businesses to cut back on utility and rental expenses. This frees up a significant amount of cash which can then be put to better use in other parts of the company.
Additionally, perks such as gym passes, or health club memberships can be cancelled to reduce expenses and the cash reused for other more beneficial employee perks.
3. Re-negotiate Contracts with Suppliers
Suppliers are critical business stakeholders, which is why it is crucial to maintain a close business relationship with them. During such difficult times, it can be beneficial to re-negotiate pricing or payment terms with them.
For example, negotiating for longer payment terms helps free up cash that may be needed to keep the company afloat while lower prices reduce cost of goods sold. Suppliers oftentimes would rather remain in business with a proven customer – a fact that can be used to your advantage during negotiations.
However, do keep in mind that such arrangements work both ways which further highlights the value of maintaining close supplier-customer relationships.
There can be no doubt that the days to come are sure to be fraught with challenges aplenty but with the right attitude and careful cash management, your business will have no trouble weathering the storm.