31 October 2016
THE IMPORTANCE OF THE CASH FLOW, AND ITS CORRECT MANAGEMENT
It would be hard to imagine a small and mid-size business which had never suffer from cash-flow shortage. One can even say that it can be business owner's big “enemy”.
Recurring to credit, or even adopting a more complex solution like raising capital, can work in short term, but it won't resolve cash-flow problems by itself.
Growth sales can even increase the cash-flow problem. That's why a sometimes delicate balance between growth and cash-flow much be achieve in order to keep business afloat and healthy.
So, what can one do in order to improve the cash-flow management?
Here are three steps one can take:
Improve the collecting of receivables– This seems the most obvious solution, but its application it's far from being an easy one. One must always remembers that on the other side is also a business to run, and it might want to delay payments in order to improve its own cash-flow.
A Balance between both parties must be achieved.
Offering discounts as a front or fast payment might be a possibility in times of stress, but that should be a onetime offer. Otherwise the client might come back for more, and a business available for discount is never a good label.
Increase sales – Easy to say than done, increase sales are most of the times a taught task in the competitive environment most business operate. Furthermore it might just increase ones accounts receivables and not improve the cash-flow, if these sales are done on credit.
One's purpose should be to increase sales on existing products, ones who have a good margin, in order to keep tight the costs of sales, and if possible the sales effort should be on the already existing clients.
Tightening credit requirements– Most of the times its results are delayed in time. A proper diligence beforehand to the acceptance of each customer will have a long impact on the cash-flow statement. Clients, most of the times, do have several suppliers, so a check reference it's a valid and sometimes affordable tool. Getting a credit agency report is also valid.
In conclusion, when a company's cash-flow is strong and healthy, it can itself committee to its stakeholders in a proper way, and create added value to all.
One should also make sure that sufficient cash is available for investment when necessary.
Rui Carrilho, Auren Portugal