We have covered the importance of cashflow and the differences between revenue and cashflow.
Also we noted what we needed to do in preparing a cashflow forecast.
Now we want to cover the most important part on managing cashflow effectively.
In managing cashflow, we want to make sure we have surplus cash available all the times.
Ways of ensuring effective cashflow management.
- Monitor the cashflow forecast closely.
- Ensuring billings are done promptly.
- Fully utilize the credit term given by the suppliers.
- Take advantage of the government incentive schemes.
- Keep minimum inventory.
- Implement effective debt recovery and collection.
- Review expenses regularly.
- Maintain a good financing line of credits.
- Cash in on the discounts offered by suppliers.
- Demand for deposit for big sales contract.
Monitor the cashflow forecast closely.
When we have the cashflow forecast, we usually notice the following scenarios:
- We forecast a positive cashflow.
- control of payments over a period of time.
So, in reviewing the cashflow, be it a weekly cashflow or a monthly cashflow, we will compare the actual and the forecast.
Since we always forecast a positive cashflow, we will not have to worry if the following work out:
a. the actual inflow of weekly cash in more than that forecasted. (assuming we are doing weekly cashflow).
b. the actual outflow of weekly cash is less than that forecasted.
if the above two scenarios play out, we are very sure that we will have cashflow surplus.
Reason being since we already forecasted a positive cashflow in which the cash inflow is more than the outflow of cash, therefore if the actual inflow is more than forecasted, and the actual outflow is less than forecast, we will have super positive cashflow.
On the contrary, if the actual inflow is less than forecasted and the actual outflow is more than forecast, then we need to review and find out the reasons.
Hence, by monitoring the cashflow closely ,we are able to take remedial action promptly, and rectify any weaknesses in operation immediately.
2. Ensuring billings are done promptly.
No billing means no payment by buyers, and no payments by buyers, we will run into cashflow issue sooner or later.
To ensure the inflow is not disrupted, we have to ensure our billings for work and services done are sent out immediately the moment work or service is done.
3.Fully utilize the credit term given by the suppliers.
a good business will take full advantages the credit terms given by the suppliers.
This is basic good cashflow management,
The main idea is – don’t pay the suppliers promptly and make sure debtors pay you quickly, that way you will not have any cashflow problem.
Sadly a lot of times, we see the opposite happen.
Bosses in their efforts to get in good term with suppliers, will instruct to pay the suppliers promptly, usually even before the end of the credit period.
And some bosses did not even bother to chase the customers to pay up fast, worry by doing so, will offend the customers, and this makes the finance staffs’ job more difficult.
4. Take advantages of government incentive scheme.
A good management will always take advantages of the government incentive schemes available.
Government such as Singapore government always has some good incentive schemes to support the businesses, especially the small medium enterprises.
So, to have a more effective cashflow, it is quite useful to take advantages of the schemes.
5. Keep minimum inventory.
This may be arguable for some people, for me I am not one who favor keep a lot of stocks.
Having less stock mean the holding cost will be lower, and less space required to keep all the stock items.
This in a way , will not hold up the cashflow.
However there may be a different school of thought especially after the post COVID-19 situation, that depend on what industry you are in.
For manufacturing outfit, keeping raw materials at certain level may be a good idea but excessive inventory? I doubt that is the way to manage the cashflow.
6. Implement effective debt recovery and collection.
Debt collection and recovery are very important for a business’ cashflow.
If a company has a lot of bad debts or long outstanding debts, this will affect the cashflow.
If the finance department is not able to ensure the debts outstanding is within the credit terms given, then it is about to review the debt collection system of the company.
7. Review expenses regularly.
Management should take time to review expenses regularly.
Especially when the weekly cashflow forecast vs actual analysis is done, any obvious signal of expenses deviation need to be investigated and assessed.
By reviewing the expenses, if the management can do away with some of the unnecessary expenses, it will go a long way in helping to improve the cashflow of the company.
8. Maintain a good financing line of credits
Though the company may be in good healthy cashflow position, it does no harm in having a good financing line of credits standby in case of emergency.
With the readily available financing line of credits, it will not be a stress but it does not mean the company can simply go out and spend lavishly.
Having the line of credit readily available is just some sort of insurance for the operation.
9. Cash in on the discounts offered by suppliers.
Suppliers may offer some discounts for the business, and any company which operate on prudent cashflow management, will definitely take advantage of that.
To some extent, the discounts offered may offer the business some help in the cashflow position, all the more crucial during the challenging time like now.
10. Demand for deposit for big sales contract.
whenever a company has a big contract or order, it is good that it can get some deposit from the buyer, this will ease the cashflow of the business in fulfilling the orders.
it will be even better if the company can arrange installment payment from the buyers.
Staying on top of the game in term of cashflow management is vital to the success of a business.
We should not let some missteps and miscalculation disrupt our cashflow management.
Take immediate action and rectify soonest possible, and you will not have to worry about cash crunch.
Always remember, take action, no matter how painful the action may be.