Managing your cash flow

We’ll help you understand the various strategies and products available to help ease your business cash flow.

Better cash management can increase the success of any company. If a firm is cash rich, it can grow revenue through timely investments. If a firm is cash poor, it can help reduce the need for loans and interest expense. While growing the bottom line may be your objective, improving cash flow will help get you there.

We’ll help you understand the various strategies and products available to help ease your business cash flow.

Managing your cash flow

No matter how profitable a business is, there’s one thing that often trips companies up: cash management issues.

For example, some companies experience seasonal cash flow fluctuations that mean they have to buy or create goods in one season to sell in another. With money going out during one part of the year and cash coming in later on, it’s imperative that these operations have enough money to keep the business running all year round.

For example, agriculture companies may grow crops during the spring and summer and sell their goods in the winter. Or franchises, like ice cream stores, see lineups in July and August and have less traffic during the cold months.

So, you need to manage your cash flow to best advantage. Use these tips to uncover the information buried in your accounts and plan for future cash requirements and surpluses.

Understand your cash position

Most accounting software has cash flow analysis functionality that can generate reports on income and disbursements on a weekly, monthly, quarterly and annual basis. These reports can reveal patterns in your cash flow. Do you have a surplus of funds in the middle of the month and a shortage at the end? Does your cash flow fluctuate seasonally? Use this history to create a cash flow forecast.

Update it regularly

Your cash flow forecast is not a static document. You may face a new competitor, the market may change or your costs may rise unexpectedly. Keep your accounting records up to date and generate cash flow reports frequently to see the impact of such changes. Then update your forecast. If you’re planning for growth, integrate new expenses and revenue into your cash flow forecast to see the impact on your financial picture. Whether for better or worse, knowing any change in projected cash flow early will give you time to adapt and strategize.

Invest unused cash

Money should always be at work, whether in the company or in investments. If your cash flow forecast shows surpluses, you’ll benefit from an investment plan. You may want to manage the plan yourself; however, you can also put systems in place so that your money is invested according to your plan without distracting you from your core business.

Plan for cash shortages early

The bank and investors always prefer to support a proactive company than a reactive one. If your cash flow forecast shows that you will need an influx of cash, contact potential sources of loans or investment earlier rather than later.

Explore cash flow solutions and products

You have options available to you to help ease cash flow crunches and keep your business running smoothly. Here are a few suggestions.

  • Line of credit - one of the best ways to keep a company running during the slow months is by tapping into a business line of credit. Withdraw money from the account to buy goods, hire and train employees or work on other projects during the quiet time then pay it back after the busy months, when you’ve got a lot of cash on hand.

  • Term loan - a lump sum cash injection is another option. For example, a farmer may want to make their business more efficient buy purchasing a new tractor. However, that person may not be able to buy the new vehicle outright. A lump sum loan allows the business owner to buy the equipment now. Hopefully, the new tractor will mean the farmer can make more money during the busy season, and that extra cash can then be used to quickly pay off the loan.

  • Tighten receivables - some people, such as event planners, have to wait up to 90 days to get paid by a customer despite having to front a lot of the cash themselves to organize the event. Try and get payment terms shortened — maybe the client can issue check after 30 days instead of 60. Also consider offering a discount to people who pay early. For example, you could reduce the bill by 2% if the customer gives you half the money the day the contract is signed and the rest after the event.

  • Accept credit and debit payments - set up a merchant account so your customers can pay you by using a credit or debit card. While this practice is essential if your business sells to consumers, many businesses are willing to pay using this method.

Managing cash flow is an ongoing priority

With an understanding of your history, you may want to set goals to improve cash flow such as:

  • Increase the number of accounts that pay within 30 days by a specific percentage.
  • Maintain a bank account balance within an established minimum/maximum range.
  • Negotiate better payment terms from suppliers.

The impact of the changes you make to reach these goals will be revealed in your cash flow reports.

The repercussions of poorly managed cash range from lost revenue to business failure. Managing cash flow effectively is critical to your business. Your policies, procedures and strategies should be reviewed annually to spot opportunities for improvement.

If not handled correctly, cash flow problems can sink a business. So talk to your Scotiabank Small Business Advisor about a line of credit, or at the very least, develop a game plan so you can stay funded in every season.

Next steps