You may witness increasing number of customers; you may experience many more sales orders; you may even beget sizable accounting profits; but it’ll all come to naught if you don’t generate enough cash. That’s right – as every shrewd entrepreneur knows, the secret to good financial health is improved cash flows! So what are the finest strategies for generating ameliorated cash flows? Whether you are a sole business person or run a small organization, the ensuing guidelines will show you the way:
A. Inflow Side
1. Screen New Customers Extensively
Your ability to engender faster cash flows depends greatly the robustness of your credit checks on new customers. Good initial credit procedures involve the proper screening, appraisal, and control of fresh customers in order to safeguard eventual receipts. Thus you should thoroughly evaluate and monitor new customers by requisitioning valid references, bank guarantees, and external credit appraisals.
2. Execute Quick and Complete Invoicing Ascertain that you generate and send invoices expeditiously to all your buyers to hasten the eventual cash flows. Hence you must:
• Ensure that your billing mechanism is regular and effective. Computerization of your invoicing procedure is highly recommended in this regard.
• See that your invoicing department generates and delivers the invoices on time. • Ensure that a dated acknowledgement is received from the customers upon invoices delivery. • Ascertain that the invoices lucidly state your credit period and other payment terms.
3. Implement Judicious Collection Measures
You ought to possess a strong internal check system to monitor your invoicing and collect account receivables. Good practices in this connection include: • Duly following up with customers the day their credit period expires in order to realize receipts.
• Immediately depositing cash and checks received in your bank to facilitate working capital requirements.
• Being strict with defaulting parties by levying interest on overdue portions. • Negotiating quick settlements with bankrupted customers via part payments. • Offering incentives to customers such as trade and bulk rebates to trigger faster receipts.
4. Analyze Your Credit and Related Decisions
Certain additional checks are imperative in order to generate improved cash flows: • You must evaluate your credit policies concurrently with your vendor payment policies. This will help determine your adverse float, if any, and allow you to take remedial measures. For instance – if your payables are usually due in 20 days but your receivables enjoy a 28-day credit period, you would need to feed this 8-day adverse float by arranging necessary cash. • A close watch on other working capital elements such as stocks must be kept. Stock ordering, re-ordering, and monthly checks must be prudent and regular. Also if a large section of inventory becomes slow moving, then greater efforts will be needed to obtain cash from other sources. • You would also do well to categorize your buyers and suppliers to pinpoint regular, average, and errant parties.
B. Outflow Side
Not only is it vital to generate more cash flows, it is also essential to preserve outgoing cash flows to the largest extent possible. You should:
1. Thoroughly Critique Vendors and Payment Procedures
Constant checks and controls must be carried out on new vendors and their payment terms.
2. Employ Smart Payment Techniques
• Postpone excessive payments until positive cash flows are generated. Timing and proper financial budgeting are crucial in this connection.
• You should attempt to pay your dues as late as possible without attractive penalties and interest. • Sometimes it can be far beneficial to rent equipment rather than buy the same thereby saving you precious cash. • Advancing your payments and purchasing in bulk can bestow appealing trade discounts – use them liberally. • Nowadays the internet has opened up tremendous avenues – online purchases can help you preserve hundreds of dollars.
The above steps should be complemented by continual budgeting and monitoring as well as constantly motivating your staff to realize organizational goals – improved cash flows are then bound to ensue!
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