Strategies for optimising your cash management

If cash is the lifeblood of any business, then it is fair to say that cash management optimization is what makes sure it pumps around its whole body perfectly.

According to a study by US Bank, the primary reason that 82% of small businesses fold is because they were not able to create a sustainable cash flow. So, it follows that even if you have good processes and tools in place to build a flourishing business, you are still most likely to fail if you don’t have a proper handle on managing your cash flow as efficiently as possible.

So, how do you do this?

Here are twelve strategies for optimising your cash management processes.

Increase your payment channels

One of the best ways to increase your cashflow is to get paid quicker, which can easily be achieved by increasing the various methods of remuneration you accept.

Every customer has a preferred way of paying and often some make their purchasing decisions around how easy it would be for them to make payments. By talking to your customers (and potential customers), about what methods they utilise most, you can effectively set yourself up to receive funds quicker from them.

Some payment methods would require them to get approval from management or rely on others within their organisation to complete – which in turn can delay when you get your money.

Negotiate with others about their payment terms

When it comes to buying products or services yourself, a good strategy for cash flow optimisation is to re-negotiate payment terms with the vendor.

This could involve taking advantage of part payment options or up-front payment discounts, which can reduce your risk of incurring cash shortages when you do settle the invoice. Alternatively, you may be able to extend the terms beyond normal practice, for instance for quarterly payments (perhaps at a cheaper price).

The benefit of doing this, particularly with vendors you regularly buy from is that you can develop cash flow projections for future expenses and investments based around these agreements. Doing this will make it much easier to forecast and manage your cash flow moving forward.

Reduce costs and sell liabilities

Another quick way to improve your cash flow is to streamline your costs and get rid of liabilities you no longer need to carry.

Businesses should always be looking to increase their profitability by identifying areas where they can save money. So, it is worth conducting a comprehensive ‘bottom up’ review, at least every quarter, that examines the necessity of every single piece of expenditure your company incurs.

Doing this should reveal several expenses for services or assets you are currently paying for that you no longer require, which you can then immediately cancel. You can also further raise your short-term cash flow by selling or renting out the assets, for example, manufacturing equipment or machinery, vehicles to staff or renting land/office space to other companies.

Whilst carrying out this review, you should also be able to determine if you have any projects currently in progress that are of a low priority. If so, you can pause them to free up the capital and generate more savings, until such time as they become a priority again.

Make more sales

As long as the cost-of-sale doesn’t outweigh the profit-of-sale, then making more sales is a surefire way to improve your cashflow.

Try running special deals or incentives to attract new customers. Also, draw upon your database to contact all of your previous or current customers to see if they need to make any purchases that will give you a quick win.

Get a cash management account

How effective is your current bank account in managing your cash flow? If this is a question that surprises you, perhaps you should consider switching to a Cash Management Account.

Often called a CMA, this hybrid financial tool can significantly enhance your cash flow optimisation by combining the features of a checking, savings and investment account into one entity. Essentially, this type of account streamlines all of your financial transactions, thus providing you with a central solution for receiving and making payments, investing and managing your cash flow.

As well as traditional banks, many brokerage firms, non-bank financial institutions and investment platforms offer CMAs. They can be useful to help customers retain a greater handle on their in-comings and out-goings between investments.

Re-evaluate your outsourcing

There are times when outsourcing is very necessary for businesses to enable them to effectively complete a task or project. However, often it is not.

Outsourcing can be very expensive and requires knowledge that, by definition, your company will never have. Subsequently, it might be cheaper for businesses to train their staff to do the work internally.

This investment in their skill set and knowledge base can add significant value to your organisation. It can also increase efficiency, save a lot of money in the long run and therefore help you to optimise your cash flow management.

Change location

For many businesses, rent is a significant part of their annual expenditure. However, big savings and improved cash flow can be achieved just by moving to another location.

Whether this takes the form of a smaller premises, or a cheaper locality, will depend on how your business operates. Though you should end up saving a tidy sum of money.

You may even be able to avoid paying rent at all, it you are able to move to a fully online status. Either way, businesses can give their cash flow optimisation an instant boost by making the decision to change where you trade.

Additionally, they can increase it further by selling any spare assets like furniture or computer equipment, they no longer have room for.

Automate the invoicing and payment process

Most businesses have long since automated their invoicing and payment process. However, if yours is one that hasn’t, then it is a good idea to do so as soon as you can.

Automation is an essential step for better cash flow management as it can ensure that invoices are sent out as soon as an order has been placed, and flagged if they have not been paid after a certain period of time.

It can also reduce the likelihood of any pricing mistakes being made by human error and facilitate online payments which means you end up getting paid quicker.

The good thing about automation is that it runs in the background. Giving you more time to concentrate on improving the cash flow of the business in other ways.

Improve forecasting and budgeting

A big contributing factor as to why companies fail is that they are unable to forecast and budget properly. To reduce the risk of this happening to your business, consider embracing the power of tools like Quickbooks online, Xero and Cube.

These tools help organisations to more effectively plan for their financial needs. However, in order to do so, you must understand exactly how much money you need to trade profitably.

The best way to do this is to build cash metrics and review their performance regularly to create synergies, as this will help companies to chart a more correct pathway.

Leverage your accountant

For any business, an accountant performs a crucial function in helping you meet your tax filing obligations. However, they also have an expert knowledge of what entitlements and tax breaks businesses can claim, which therefore can have a positive impact on your cash flow management.

Accountants are very adept at spotting opportunities for businesses to improve their cash flow through expensing. This makes them an excellent resource to tap into, as they can also identify outgoings that can be replaced by less costly alternatives or even cut back entirely.

Build a contingency fund

To support your cash flow and protect yourself from volatile market conditions, every business needs a contingency fund of between three to six months’ worth of expenses.

A fund such as this provides good security in tough times and can be dipped into if your out-goings temporarily exceed your in-goings. Even a month’s worth of contingency buys you a bit of time, so if you don’t have such a fund already in place, you should set about creating one ASAP.

Seek extra funding

If you need to quickly improve your cash flow a good way to do this is to seek out extra funding.

Whether that be from banks, angel investors or through government grants and programmes it could be a good way to inject extra capital into your coffers to stabilise your company.

Before committing your business in this way, make sure you do your due diligence to fully understand the impact doing so could have on it.

Bottom Line

At the end of the day, cash flow optimisation must be a constant work-in-progress, because in business, you can never rest on your laurels.

The twelve strategies outlined in this post should go a long way towards helping you develop a more robust cash flow that will reduce the chances of you suddenly facing a cash crisis.

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