3 Tips for Managing Cash Flows Strategically

by / Thursday, 04 September 2014 / Published in Bad Credit Business Financing

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Cash flows must be managed carefully in order to allow a business to grow at an optimal rate, in the same way that a plant needs the right balance of water and sunshine to grow. There needs to be enough cash on hand at any given time to allow for maneuverability within the business, lest business owners find themselves needing to have cash on hand that is tied up in inventory or already spent on other aspects of business development. Conversely, if a business holds on to too much capital and does not invest it into the things that they need to meet client demand, they can wind up losing business to competitors who are more poised to deliver quickly. How should your business find a balance? While there is no way to predict the future with absolute certainty, as a business grows a clearer picture of how much cash should be kept on hand will start to form through experience. For example, when a business is preparing to enter its busy season, much of their cash flow may go into the purchase of inventory in order to be prepared for a spike in demand. At the end of the season, the business will likely scramble to convert unsold inventory back into liquid capital in order to have assets on hand with which to weather the leaner months.

1) Know the seasonality of your business. Look at the past sales data for your business, and you will likely be able to recognize patterns of activity that indicate when you can expect heightened customer activity and when you should expect less. It is essential to get as good an understanding of these natural ebbs and flows as possible, since your annual sales patterns can be used as a type of shorthand when planning your growth in relation to your cash flows. If you are tempted to hold on to a large amount of liquid capital, but are aware that product demand is expected to grow in the next few months, then at the very least make arrangements for obtaining emergency inventory in the event that you get an influx of orders. While seasonality alone will not define your cash flows, in the same way that a good sailor will know the pattern of the tide in their ports of call, you should be aware of the general shape of your cash flows during the year.

2)  Know how long it takes for you to turn cash into inventory, and vice-versa. Apart from the seasonal trends of your business, part of knowing how to effectively manage cash flow is knowing the rough turnaround time it takes you to turn capital into inventory and how long it typically takes to liquidate said inventory. Again, there is no way to predict this kind of thing with 100 percent accuracy because of the fact that no matter how well you plan, the unexpected will always happen, but with that in mind, having a general picture of how long it takes you to go from cash to product and back will allow you to more minutely plan the timing of your various projects in order avoid being caught without the right kind of assets.

3) Know your options for financing in a pinch. When the unexpected happens, as it invariably will, you should not be stuck without a backup plan in terms of obtaining liquid capital. While bank loans will typically take too long  to represent a viable form of emergency financing, alternative capital can usually be accessed in as little as a 48 hour period, making it a potential solution to cash flow gaps that need to be bridged on an asap basis. Maintaining a minimum balance in your business accounts not only makes sense as a safeguard to gaps in sales volume, but it will also come in handy in the event that you do find the need to apply for alternative capital, since bank statements play a large roll in determining the overall health of a business in question.

Photo Credit to Tax Credits on Flickr

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