Success in Cash Management
Nowadays, companies often focus more on profits and losses in relation to how they analyze financial statements. Management does not often put any sort of emphasis or focus on cash flow as opposed to profits and losses accounts. However, when it comes to sound financial decisions, there is still a need to put some sort of importance on cash flow management. CFOs and the teams working under him or her can actually add more value to the company if they also put a lot of energy and effort into managing cash flows properly.
Why is Cash Flow Management Important?
While there are businesses that believe that profits and losses are more important, we dare say that cash flow is just as important or even more important as a metric when analyzing a company’s financial health. In that respect, when your cash flow is positive, you would be able to allow your company to perform at a sustainable rate while helping it grow well. That is why startups and growing businesses that fail to see the importance of cash flow often fail.
Startups and growing businesses are arguably much more in need of cash flow management that large companies. The reason for this is that growing businesses cannot function or perform activities well without cash as opposed to large businesses that always have pools of cash to spend on for their projects and daily tasks. In that regard, proper cash flow management should start as early as possible for small companies that are still in the middle of growth.
Strategies for Cash Flow Management
Working capital metrics should be introduced to the entire business
When it comes to proper cash flow management, it is often the case for many different businesses that the metrics used for proper cash management are only used by the finance team. However, cash flow is not just the responsibility of the finance team because knowing how to properly manage cash flow is just as important of a responsibility for other departments in a business. That is why it is imperative that working capital metrics should be introduced across the board so that everyone in the company will have their fair share in cash flow management.
Treat suppliers well
It is often the case that many growing businesses use suppliers as banking facilities that they can just pay off later on during a desired date. This is not the best way to build good relationships with your suppliers as they are not banking institutions. They too need to be paid accordingly and timely. In your case, accounts payable is also a key element in working capital. There is a need for you to settle accounts payable promptly, especially to your suppliers, because of how it is actually indicative of how healthy your finances are and how well you are managing your cash flow.
Way your options when it comes to working capital
When it comes to looking for working capital to help grow your profitable business, you should try to weigh your options first before going to banks and other financial institutions. A lot of banks offer good working capital funding but they can be expensive if you factor in the large interest rates that you will end up paying at the end of the loan.
In that case, you might want to look at other non-banking options. You may want to look at companies that finance accounts receivables. What these companies do is to look at your accounts receivables and then fund you up to 90% of your total receivables so that you will have cash to use as working capital to fund your company’s growth. They do charge you a fee but they are not as expensive as banks.
Managing Working Capital
There are three main components of working capital: inventory, receivables, and payables.
The inventory component is a measure of how often the company was able to sell and then replenish products over a given period of time. Of course, a higher sale to inventory ratio shows how good your company is doing when it comes to its sales. The challenge for most businesses is to make sure that it is holding enough inventory while making sure that there are no excess products building up.
A good measure when it comes to accounts receivables is the number of days it takes for you to collect payment after a sale has been made. This is usually when there are sales made on credit. The key here is for you to look for creative ways to make it easier for you to collect payments and to account for any receivables your company may have overlooked. Using technology to your advantage by utilizing automated collection will make it easier for you to receive payment in a fixed span of days.
Although a lot of companies would rather focus on the income statement and the revenue portion of the finances, there is still a need to give some sort of importance to cash flow management because, as they say, cash is reality. Your company will only be as good as the cash it holds as compared to when your business only relies on profits and revenue.