Optimize your cash flow with these simple steps.
Buffering your business from ebbs and flows is important. Take action now to build positive cash flow and protect your business.
There are specific actions and considerations you can take now, to help insulate your business, regardless of the twists and turns in the marketplace. These actions, focused on optimizing your cash flow can help strengthen your business in any market. Very importantly, these steps will help protect you if the economy worsens.
1. Review customer invoicing, collections and payment terms
Reviewing and optimizing your billing and collections is just good practice at all times. Your business is not intended to finance your customers’ business. Be sure you offer payment terms that are competitive but not more favorable than necessary.
Invoice often and as early as possible/practical to start the terms ‘clock’ to receive client payments. Additionally, focus on collection activity for past due items to ensure that your aged receivables and days sales outstanding are as close to your optimum metrics as possible. Manage these metrics weekly and take appropriate actions when needed to remain on track.
2. Request improved credit terms from suppliers
Just as you are managing payment terms for your customers, make sure to review the payment terms you are offered by your vendors and suppliers. In many cases you can negotiate more favorable terms if you are a long-standing and valued customer to your suppliers.
3. Secure alternative sources of credit from trusted financial institutions
In addition to your traditional financing arrangements, you should consider options for additional sources of financing and credit, should you need it. These relationships are best negotiated when you don’t actually need to activate them immediately. You can source lines of credit with competitive rates when you are not over a barrel needing to urgently secure cash flow to fund your operations. Start with your current banking relationship and shop alternatives to negotiate your best deal.
4. Build cash reserves where possible
This task is hard, but important. A good rule of thumb is a plan to build operational cash reserves that would cover your essential business expenses for a period of at least three months, with six months preferred. Taking this action helps insulate your business, staff and clients should any market action impact your top line sales and/or incoming cash flow.
The most effective way to support the health and success of your business is to take targeted and strategic actions before you actually need them. If your business is well prepared ahead of time you will have the highest probability of ongoing success — regardless of market and economic conditions.
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