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Better Cash Flow Analysis: Five Tactics to Improve Cash Flow
Companies performing cash flow analysis on a regular basis generally have much better financial liquidity resulting in improved profits and less stress for management. Monitoring the ebbs and flow of cash through business operations eliminates surprises and provides more time to react to restrictive gaps between payments and receipts.
Understanding the natural flow of cash through the business and recognizing the typical time lapse between when cash is required to be paid out for expenses and is collected from revenues, the so called "cash gap," helps management function more efficiently. In addition, this degree of cash flow analysis provides better metrics to continually make improvements to speed revenue collections while illuminating ways to slow down or postpone payments.
There are countless operational areas that may hold potential to improve business cash flow, depending on the industry sector, maturity of business and nature of client base. Here are five tactics available to most businesses that can improve cash flow quickly:
- Prompt invoicing - some businesses are lax about sending out invoices, which always delays payment receipt. Review procedures to ensure that invoices are delivered to clients as soon as possible - even if they're ahead of the product/service delivery. Getting the clock started earlier on payment due dates is an important step toward faster payments.
- Improve payment terms - make sure the clients knows exactly when you expect to be paid, and provide incentives for early payment - in the form of modest discounts - and disincentives for late payments - in the form of penalties or interest.
- Strategic pricing - Be sure the company invoices for all the extra services provided beyond the basic product/service and has devised an appropriate cost for the full range of potential ancillary requests that might come from clients. For example, be ready to assess a definitive charge for extras like special handling, overnight shipping, weekend service or other extraordinary requests that may be received.
- Negotiating better payment terms - as vendors and suppliers get more familiar with the business and become comfortable with the reliability of payment, ask for payment terms. Request that invoices be due as near as possible to the date at which company receipts are collected to reduce or eliminate funding gaps in operations.
- Annual expense review - Make it a regular habit to go through the detailed general ledger and review all expenses at least once each year. Many costs get paid only because no one says no. Make sure all services - subscriptions, publications, recurring services, etc. - are needed and wanted. If not, stop them at the earliest time available.
These tactics will have varying potential to improve cash flow based on the nature of the business, its clients and competition. But all companies can benefit from having a bank credit facility in place to provide a plan for cash flow fail-safe. Whether it's a seasonal rough patch that depletes the firm's liquidity or an unexpected opportunity to fulfill a large sales order, having bank credit immediately available will mean that business continues smoothly regardless.
Credit lines are offered to meet a variety of business needs, ranging from credit cards to revolving credit facilities. They provide the ultimate peace of mind for company management in a dynamic economy.