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Stabilising Your Cash Flow

Provided by SME Solutions Center - Kenya


Cash Flow Management

Proper cash flow management requires you to properly control the monies going in and out of your business. Cash flow projection or cash flow forecasting is an integral component of this process. Cash flow management has various elements such as:

  • Managing inventory
  • Controlling accounts receivable
  • Managing debtors’ accounts

Increasing Your Cash Flow

By increasing your business’ cash flow, you cause a number of changes. For, example, you:

  • Generate a business cycle that is predictable, thus facilitating budgeting and planning
  • Reduce fixed capital amounts that you need to run your business  

Strategies

So as to increase your cash flow, you can take different measures, including:   

  • Organising your billing plan
  • Stabilising your clientele
  • Monitoring your prices
  • Joining a purchasing cooperative
  • Avoiding purchasing from a single store
  • Firmly controlling your inventory
  • Leasing rather than buying
  • Capitalising on prompt payment incentives 
Monitor your Product Prices

Based on production costs and the market situation periodically review and adjust your prices upwards. This process will entail cash flow analysis. If reasonable and gradual, such price hikes are expected by customers.   

Systemise your Billing Program

Fast receipt of accounts receivable sums earns you capital that could go into business expansion initiatives. For frequent and early billing, use suitable accounting software programs to set up a billing system. Major programs include Peachtree Complete Plus Time & Billing and QuickBooks Pro. Owing to the programs’ automatic classification of accounts receivable ages, you can immediately act on late accounts.    

Lease Rather than Purchase

By leasing, you benefit from stable cash flow. You can use the saved cash to grow your business. True, in the long run, leasing is more costly than buying. It however offers you increased liquidity benefits. Leasing also offers you certain tax benefits.     

Avoid Procuring from a Single Supplier

For fiscal efficiency, you would buy from various suppliers. Base your choice of supplier on parameters such as prices and value-added services. For example, you would buy complex electronic gadgets from a supplier who offers assembly services. The ensuing savings help stabilise your cash flow.     

Firmly Control your Inventory

Take note that excess inventory ties up business capital. To have a tight control over inventory, you would institute measures such as: 

  • Avoiding purchasing excess stock even when you are offered quantity discounts
  • Regularly evaluating your inventory cycles to ensure they fall within industry norms
  • Occasionally examining your inventory for out-of-date stock   
Inventory Turns Formula

Inventory Turn = Cost of Goods Sold / Average Inventory Value

To handle obsolete stock, you could take either of two options, namely:

  • Disposing it of at cost price so as to free up business cash
  • postponing incoming orders
Stabilise your Clientele

In case you work on a project basis with your clients and then break the engagement after project completion, arrange for a more enduring relationship. Negotiate with your transient clients for a retainer-based engagement. You could offer incentives like discounts. The likely reduced profits could be counterbalanced by a stable cash flow.    

Join a Buying Association

So as to benefit from quantity discounts, organise a buyers’ cooperative with peers. After making purchases, divide the items amongst yourselves.    

Take Advantage of Early Payment Rewards  

Settle your payables promptly if you earn discounts from your creditors. If the incentive is non-existent, negotiate for it. In the long run, the savings accruing from such discounts comprise a sizable capital chunk.

 

Cash flow management entails the correct regulation of cash outflows and inflows. Such management incorporates cash flow analysis. Suitable cash flow ensures that your business is not starved of cash which is a basic input for smooth operations. Accurate cash flow forecasting or cash flow projection facilitates proper management. Proper cash flow management is therefore priceless to your small business. It makes existing business trends foreseeable, thus facilitating budgeting and planning. Appropriate cash flow also eases pressure on fixed capital reserves by omitting the need to shore up your business using fixed cash assets. You may use a number of techniques to optimally manage your cash flow. By preferring leasing to buying, you save money, thereby boosting cash flows. Stringent inventory controls ensure that your business’ money is not unnecessarily tied up. You can also improve your cash flow by periodically reviewing supplier and utility charges and rates. You can jointly purchase supplies, thus enjoying quantity discounts which help to improve cash flows. Another tactic for boosting your cash flow is to practice selective buying by preferring discount stores, thereby saving cash. Regular price reviews could as well enable you to appropriately adjust rates, thus boosting your cash flow.  

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