Effective Cash Flow Management Strategies for Business Sustainability

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Improving cash flow is a strategic approach to ensuring financial stability and independence. Even small changes in financial habits can have a big impact over time.

1. Improving Cash Flow Management Strategies via Cash Flow Calendar

Cash flow management strategies in operating activity include using a cash flow calendar.

The cash flow calendar (payment calendar) is a detailed schedule that outlines when a company expects to receive money (e.g., from sales of goods or services) and when it needs to make payments to others (e.g., suppliers, employees, landlords) within a specific period (typically a month, quarter or year).

For example, if you have an e-commerce shop, your cash flow calendar for a specific period would include the following:

• When you expect to receive payments from the sale of goods.
• When you need to pay your suppliers for new inventory.
• When rent and utility bills are due.
• When you need to pay your employees’ salaries.

To begin, choose a calendar format that suits you best. The simplest option is to create a spreadsheet (or use a ready-made template) in Excel or Google Sheets. Columns might include a description of payments and dates of the chosen period.

A cash flow calendar can include planned and actual data (if already available):

• Planned payments allow forecasting both income and expenses.
• Actual payments reflect the real-time cash flow situation within the chosen period.

We will illustrate an example of a payment calendar for one month (June):

Example of Business Cash Flow Calendar

Description	1st Jun	5th Jun	12th Jun	15th Jun	25th Jun	30th Jun
Beginning Balance	$1,000	$1,000	$1,700	$1,200	$1,200	$700
Cash Inflows (Income):
Product Sales		$2,500				$2,500
Service Fees			$3,000		$1,500
Total Income		$2,500	$3,000	–	$1,500	$2,500
Cash Outflows (Expenses):
Office Rent		-$1,800
Employee Salaries			-$3,500
Marketing					-$,2000	-$1,200
Total Expenses		-$1,800	-$3,500	–	-$,2000	-$1,200
Net Cash Flow		$700	-$500	–	-$500	$1,300
Ending Balance	$1,000	$1,700	$1,200	$1,200	$700	$2,000

Explanation for the example:

• Date: the date on which the expense or income is expected.
• Payment description: a brief description of the payment (salary, rent, marketing, etc.).
• Amount: the amount of payments or receipts in US dollars.
• Net Cash Flow = Total income + Total expenses
• Ending Balance = Net cash flow + Beginning balance of the previous date

A payment calendar is a powerful tool for financial planning. It provides a clear overview of your cash position, helping you avoid financial surprises (like cash gaps) and make informed decisions to grow your business.

2. Improve Cash Flow with Accounts Receivable Management

Let’s consider cash flow management strategies in the part of accounts receivable management.

 Why is accounts receivable management significant for businesses? Clients delaying payments can disrupt your cash flow, making it difficult to cover essential expenses such as payroll, inventory, and rent. This can lead to financial instability and, in severe cases, even force a business to close.

2.1. Effective debt collection methods

1. Reminders: The first step to success. Never hesitate to remind your clients about outstanding debts. The sooner you start, the more likely they are to pay on time. Use a variety of communication channels:

• Email: convenient for mass mailings.
• Phone calls: a personalized approach that allows you to identify the reason for the delay.
• SMS messages: a short way to remind about the debt.

2.  Individual approach: the key to solving the problem. Not all debtors are the same. Try to understand why the client is delaying payment. Perhaps they are facing financial difficulties or simply forgot. Offer an individual solution:

• Installment payments: divide the debt into several parts to make it easier for the client to pay.
• Contract renegotiation: if possible, review the terms of the contract and find a mutually beneficial solution.
• Discounts: offer a discount for full payment of the debt.

3.  Penalties can motivate people to pay up. Add a clause to your contract about late fees. It’ll give your clients a reason to pay on time. But make sure the fees are fair and won’t scare them away.
4.  Legal actions: Only do this if you have to. If nothing else works, you can take them to court. But remember, it’s a long and expensive process, so try everything else first.

2.2. Preventing the occurrence of doubtful and bad debt

How can we minimize the occurrence of accounts receivable and avoid transferring them to doubtful and bad debt? Establishing clear payment terms is the foundation for the successful management of accounts receivable. Let’s delve deeper into additional aspects that can help you optimize this process:

1. Detailed Payment Terms in Contracts.

• Payment terms: be specific. Indicate the exact number of days after delivery of goods or provision of services within which payment must be made.
• Penalties: clearly specify the amount of penalties for late payments. This may be a fixed amount or a percentage of the outstanding debt.
• Interest calculation for late payments: indicate how interest is calculated: daily, weekly.
• Force majeure: provide for possible force majeure circumstances that may affect the performance of obligations.

2. Advance Payments and Their Significance.

• Advance payment amount: determine each contract’s advance payment amount individually, depending on its value and risks.
• Milestone payments: for large contracts, several payment stages can be provided, tied to specific stages of work completion.

3. Offer Different Ways to Pay.

• Go cashless: make it easy for customers to pay with cards or digital wallets. It’s easier to keep track of.
• Online payments: let customers pay you online. It’s convenient and easy.
• Pay later: If times are tough for your best customers, you could let them pay later.

2.3 Steps to improve cash flow connected to accounts receivables:

Importantly! The sooner you start managing accounts receivable, the less accumulated doubtful debt the company will have in the future, payment for which will be difficult to obtain from unscrupulous customers.

3. Improve Cash Flow with Inventory Management Optimization

Cash flow management strategies include inventory optimization. This makes it possible to free up cash flow from stocks and use it to ensure stability and business growth.

Inventory refers to a business’s goods and materials for production or sale. Effective inventory management is crucial for optimizing cash flow and ensuring smooth operations.

Types of Inventory include:

• Raw Materials: Basic materials used in production (e.g., metals, plastics).
• Work-in-Progress (WIP): Partially completed products in production.
• Finished Goods: Ready-for-sale products available for customers.
• MRO Supplies: Items needed for daily operations (e.g., tools, cleaning supplies).
• Packaging Materials: Boxes, wraps, and other materials for storage and shipping.

Strategic inventory management helps businesses reduce costs, prevent shortages, and improve efficiency.

3.1. Inventory management methods

 1. ABC Analysis:

ABC analysis categorizes inventory items into three groups based on their value or contribution to profit.

• Group A: these are your “star products” – items with high value or high sales volume. They require the most attention, such as frequent inventory checks, promotions, and advertising.
• Group B: these are your “average performers” – items with moderate value or sales volume. While they also need monitoring, they don’t require as much attention as Group A items.
• Group C: these are your “slow movers” – items with low value or low sales volume. You can keep smaller quantities of these items in stock or consider discontinuing them if they’re not profitable.

Goal: To focus resources on the most valuable items, minimizing risks and costs.

Let’s calculate. Imagine you run a store with 10 different products. You know how many of each product were sold for a certain period (a quarter or a year) and how much each one cost. In our case, let’s use a period of one year to avoid seasonal deviations.

Calculations:

1. The cost of each item is determined by multiplying the quantity by the unit price. Item 1: 90 * 100 = $9,000.
2. The total cost of all items is calculated by summing the cost of each item. Item 1 + Item 2 + … + Item 10 = 9,000 + 6,000 + … + 9,600 = 60,000.
3. Calculation of the relative share of each item (item cost / total cost * 100%). Item 1: 9,000/60,000 * 100% = 15%.

Item	Number of units sold	Cost per unit (USD)	Total cost (USD)	Relative share
Product 1	90	100	9,000	15%
Product 2	100	60	6,000	10%
Product 3	150	30	4,500	8%
Product 4	200	80	16,000	27%
Product 5	50	60	3,000	5%
Product 6	450	10	4,500	8%
Product 7	160	25	4,000	7%
Product 8	400	5	2,000	3%
Product 9	20	70	1,400	2%
Product 10	240	40	9,600	16%
Table total			60,000	100%

Let’s update the table now by ranking from the largest share:

4. Ranking items by descending share: items are arranged in descending order based on their share of the total cost.
5. Product classification based on share summarising:

• Group A: The items with the highest total share of 70-80% are the most valuable for the company. They probably create the main profit for the business. So, the company should concentrate its attention on creating stocks and selling them to generate higher revenue and profit. They include products 1, 2, 3, 4, and 10.
• Group B: items with a medium share total of 15-20% less valuable for the business. In our example, these are Items 5, 6, and 7.
• Group C: items with the lowest share. Items that account for less than 5-10% of the total value. In our example, this includes all other items.

Item	Number of units sold	Cost per unit (USD)	Total cost (USD)	Relative share	Group	Group Total
Product 4	200	80	16,000	27%	A	75%
Product 10	240	40	9,600	16%	A
Product 1	90	100	9,000	15%	A
Product 2	100	60	6,000	10%	A
Product 3	150	30	4,500	8%	A
Product 6	450	10	4,500	8%	B	20%
Product 7	160	25	4,000	7%	B
Product 5	50	60	3,000	5%	B
Product 8	400	5	2,000	3%	C	5%
Product 9	20	70	1,400	2%	C
Table total			60,000	100%

Note: Group A, B, and C percentages can vary by company.

ABC analysis is dynamic and requires regular updates to account for product mix and demand changes.

2. Just-in-Time (JIT) System:

JIT system orders inventory items only when they are needed for production or sale.

Goal: to minimize inventory levels, reduce storage costs, and prevent product obsolescence.

Benefits:

• Cost savings: reduces the need for large warehouses and associated costs.
• Improved quality: less time in inventory means fresher products and fewer defects.
• Increased efficiency: reduces waste and improves production flow.

An example: You received an order to sell 105 croissants. Imagine you’re trying to figure out how many ingredients you need to make this order. You know to make a batch of 15 croissants, you’ll need:

• 500 grams of all-purpose flour
• 200 milliliters of water
• 100 milliliters of milk
• 130 grams of unsalted butter
• 7 grams of dry yeast
• 20 grams of sugar
• 5 grams of salt
• 1 egg.

To cook 105 croissants for the order, you need 7 baking cycles (105/15 = 7)

So, for 105 croissants, you need to buy the following ingredients:

• Flour: 500g * 7 = 3.5 kg
• Water: 200ml * 7 = 1.4L
• Milk: 100ml * 7 = 700 ml
• Butter: 130g * 7= 910g
• Dry yeast: 7g * 7 = 49g
• Sugar: 20g * 7 = 140g
• Salt: 5g * 7 = 35g
• Eggs: 1 pc * 7 = 7 pcs.

Certainly, you need to pay attention to possible product loss during production and other important factors. However, this approach allows for minimizing storage costs and saving money, avoiding investing money in advance in inventory.

ABC analysis helps businesses prioritize their inventory, allowing them to allocate resources effectively. JIT, meanwhile, ensures that there are minimal stocks and optimized production. By implementing both of these tools, businesses can significantly improve their overall performance.

3.2. Minimizing storage expenses

In addition, let’s pay attention to the steps for minimizing storage costs:

• Optimal order quantity: calculate the optimal order size to minimize shipping and storage costs.
• Efficient use of warehouse space: organize a rational placement of goods in the warehouse.
• Regular inventory: control the quantity of goods in the warehouse to avoid losses and damage.
• Sales analysis: forecast demand for goods and adjust order sizes.

3.3. Preventing stockouts

How to avoid product shortages?

• Accurate demand forecasting: utilize historical sales data and seasonal trends to predict future demand.
• Safety stock: maintain a small buffer of inventory to account for unexpected circumstances.
• Flexible suppliers: partner with suppliers who can provide quick delivery times.
• Early warning system: implement a system to alert you when inventory levels of critical items are low.

So, by implementing effective inventory management, you can reduce costs, increase business efficiency, and ensure high levels of customer service. Selecting tools and methods that best suit your business is important.

4. Improve Cash Flow with Accounts Payable Management

Let’s delve into another crucial aspect of business: accounts payable management as a part of cash flow management strategies.

Here are some more examples:

• Rent arrears: if you lease a store or warehouse and haven’t paid the rent for the current month, you have a liability to the landlord.
• Utility bills: unpaid electricity, water, or gas bills constitute accounts payable.
• Tax liabilities: the amount of taxes your company owes but hasn’t paid yet is also considered accounts payable.
• Bank interests: monthly payments of interest are a form of accounts payable.

The key points are:

• Accounts payable is a financial term referring to the money a company owes to others.
• It occurs when a company receives goods, services, or resources but hasn’t paid for them yet.
• Paying off accounts payable on time is crucial to avoid issues with suppliers and creditors.

We should delve deeper into strategies that can optimize our company’s accounts payable management. This will enhance our financial position and strengthen our partnerships with suppliers.

4.1. Optimizing Payment Terms

• Bulk orders: negotiate favorable terms for large order quantities. This could include extended payment terms or discounts.
• Timely payments: demonstrate your company’s reliability by paying invoices promptly. This builds trust with suppliers and opens doors for more flexible terms in the future.
• Negotiations: actively negotiate extended payment terms with suppliers. Justify your requests with reasons such as seasonality or unforeseen expenses.
• Alternative payment options: offer suppliers alternative payment methods like partial prepayments or installment plans.
• Supplier sourcing: compare offers from multiple suppliers to identify the most favorable terms.

4.2. Building Long-Term Partnerships

Build long-term relationships with suppliers. It will create the following benefits for your company:

• Better pricing: suppliers may offer discounted rates to loyal customers.
• Flexible payment terms: the possibility of extended payment terms and other benefits.
• Priority service: suppliers may be more accommodating in unexpected circumstances.
• Joint development: the opportunity to collaborate on developing new products and services.

It is crucial to remember:

• Balance of interests: always seek a win-win solution when negotiating with suppliers.
• Long-term perspective: build relationships with a focus on long-term cooperation.
• Ethics: all negotiations must be conducted within the legal framework.

In Conclusion, proper management of your company’s accounts is essential to your strong financial position. The ideas we’ve discussed can help you pay your bills on time, build better relationships with your suppliers, and keep your business running smoothly. It is recommended that you create a plan that is appropriate for your company and industry.

Pay attention! A long payment deferment can lead to a large debt to suppliers in the future and the inability to pay it, so the payment deferment must be chosen carefully, understanding that you will still have to pay for these goods or services in the future and you need to control the payment deadlines in the payment calendar.

Conclusion

To improve cash flow management strategies, it is necessary to establish control over accounts receivable and payable to avoid cash gaps and transfer accounts receivable to doubtful and bad debt

Effective inventory management is crucial: we have considered two popular methods, ABC analysis and the JIT system. Although there are other methods, a comprehensive approach using the above methods can yield positive results for inventory in terms of cash flow.

A cash flow calendar is useful for planning and analysis. And a particularly powerful tool is software. It unloads routine processes and, at the same time, provides opportunities to cover financial processes as much as possible, especially when volumes increase, and we want to maintain a high level of quality and efficiency in our activities.

By effectively implementing these strategies, businesses can achieve better cash flow management, leading to improved financial stability and growth opportunities.

In addition to cash flow management, it is important to understand how to calculate and analyze a company’s profit, so try our free calculators to calculate a company’s net profit and read an article on how to increase profit.

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