Whether you run a large company, a small business, a start-up, or if you are a solo entrepreneur, one of the priorities you should focus on is the way you manage your cash flow. Robust, accurate, and secure cash flow management forms the foundation of a solid, successful, and competitive business – one that can stand the test of time and the many unpredictable challenges that the global market often throws you.
Only after you have done so will you be able to start focusing on other aspects of your business – from launching your blog to creating your own YouTube logo – with greater financial stability and peace of mind. If you are interested in learning more about cash flow management, its advantages, and how to put a strong cash flow management strategy in place, then keep reading.
Cash flow management: a definition
First, let’s begin by clarifying what cash flow management is. This expression indicates the process business owners undertake when they want to better understand, optimize, and maximize the money that moves in and out of their business.
When the business generates more money than it spends, the cash flow is positive. When the money coming out exceeds the money coming in, the cash flow is negative, and prompt action should be taken.
To calculate the exact cash flow of a company, you need to record how much money you have available at the beginning of a predefined period and review it against the money that’s left at the end of that period. Generally, companies run cash flow reviews weekly, monthly, or quarterly.
Another essential element of cash flow management to remember is that its importance transcends the industry and the size of a business. Any company – from UCaaS services to retailers, from healthcare organizations to industrial manufacturers – benefits from having reliable cash flow management in place.
The benefits of cash flow management
Let’s now consider some of the great advantages of having a great cash flow management strategy for your business.
It helps you budget better
Creating a budget is a good idea but building a well-structured cash flow management strategy is so much better. Why? Because budgets, as accurate as you might try to make them, will always fall short when it comes to truly reflecting how your finances are doing. Cash flow management, on the other hand, boosts the accuracy of a standard budget because it is a realistic representation of the actual money that your business has available.
It decreases stress
Do you remember how stressful it was to find a great, business-grade VoIP? We all agree that entrepreneurs already have a lot on their plate, and if there’s a way to reduce the amount of stress, you should seize it.
And guess what? Cash flow management can make you feel less stressed and more in control of your finances – regardless of whether your cash flow is positive or negative. Even when it’s negative, it empowers you with solid data and information that can equip you with the resources and knowledge you need to make tangible improvements to the way you manage your money.
It allows you to forecast potential issues
Another key advantage of adopting a cash flow management strategy is the ability to predict any possible money problems that might occur in the future. If you can foresee any pitfalls well ahead of time, you will be better prepared to deal with them.
It identifies opportunities for growth
At the end of the day, most companies dream of growing exponentially. A standard VoIP wants to become the best virtual phone system for small businesses, a new brand of healthy snacks aims to take the market by storm, an electric car manufacturer plans to smash its competitors, and so on.
Well, with a cash flow management strategy, you are one step closer to achieving this. By shedding light on how much money you have left at the end of a pre-set period, you can decide whether to spend it on something urgent or save it for your growth plans. If your cash flow is positive, your savings will begin to stack up, enabling you to expand your business as you see fit.
Improve your cash flow management with these 6 best practices
Considering how vital cash flow management is for your business, you might wonder how to put a solid cash flow management strategy in place. Take a look at the six best practices below.
1. Build an accurate forecast
Without any doubt, one of the priorities of an exceptional cash flow management solution is enabling you to make accurate financial predictions. By doing so, you will be able to identify any potential issues, even before they arise, and maximize any favorable situations to boost your cash flow.
To achieve this, begin by listing a series of considerations that you will use for your forecast. For example, these could include predictions on inflation rates, raw materials prices, market demand, investing in a Youtube logo, etc. Then, consider any potential price changes for your products or solutions: should you raise some of these prices, keep them as they are, or lower them?
All these bits of information will help you to put together a realistic, accurate puzzle of your cash flow, which, in turn, will support better decision-making strategies.
2. Get better at invoicing
An excellent cash flow management strategy is strongly tied to good invoicing processes. Why? Because invoices are, ultimately, the proof that specific amounts of money came in and out of your company, at particular times, and for specific purposes.
You could, for example, automate your invoicing workflows for all the parties involved – suppliers, clients, partners, employees, contractors, and so on – to pay the exact sum at the earliest possible time, helping you maintain a healthy cash flow.
3. Adopt the right technology
In a global marketplace that is increasingly shaped by a comprehensive digital transformation, some of the best ways in which you can manage your cash flow include specific software and technology tools.
Therefore, you should consider implementing a powerful next-generation tech solution that can help you take your cash flow management to the next level. Think about, for example, artificial intelligence, machine learning, advanced data management and analytics, and process automation.
It is important to note that upgrading to the right technology can hugely benefit small businesses, too. Of course, if you run a small business, you probably won’t have the same budget as your larger rivals, but you will still be able to access some great, open-source technology solutions at an affordable price.
4. Consider financing
Many business owners cringe a little when they hear the term “financing”. However, this can help improve your cash flow management. Think about it. An occasional injection of cash when your business needs it most can turn into a very advantageous opportunity.
Naturally, this shouldn’t happen on a regular basis – nor should it exceed what your company genuinely needs – but one-off, short-term financing (such as a line of credit) might help. Once you have gotten back on your feet and your cash flow is positive, you can focus on maintaining it that way instead of asking for more financial assistance.
5. Optimize inventory management processes
Do you have lots of stock sitting idle in your warehouse? Well, that’s certainly not generating any positive cash flow. But with a good cash flow management strategy, you can prioritize stocking the products you know will sell more while dropping the stock levels of those that won’t generate much revenue.
6. Focus on becoming agile and resilient
The resilience of your supply chain is another crucial aspect to consider when thinking about cash flow management best practices. As we mentioned earlier, inventory can present both challenges and opportunities in terms of cash flow, so it’s a good idea to ensure that your inventory processes are nimble, simplified, and forward-looking.
By doing so, your workflows will become slimmer and easier to understand and manage, and you will also be able to reduce human error, waste, and potentially expensive delays. Ultimately, your company will become leaner, more dynamic, and more focused on identifying – and applying – cash flow management processes that truly return exceptional results.
Ready to supercharge your cash flow management processes?
Every single business out there – from those selling e-business card solutions to e-commerce stores, consumer product manufacturers, food retailers, and more – should prioritize a solid cash flow management strategy.
Businesses must do so if they are serious about succeeding in an ever-crowded, competitive, and challenging global market. The benefits of robust cash flow management are numerous, and they include more profitability, better accuracy, and more growth opportunities.
From selecting the right cloud technology solution to optimizing invoicing, forecasting, and supply chain management, there is a lot that you can do to enhance your cash flow management. Which best practices will you follow for your cash flow management strategy?
John Allen is director of SEO at cloud-based business communications services company 8x8.
*This blog post is intended for informational purposes only and is not intended as financial advice.
**Melio does not provide legal, tax or accounting advice, and you should consult with a professional advisor before making any financial decisions.