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How to manage your cash flow

In this article, we explore the ability to apply cash-flow management techniques to suit varying business scenarios.

While businesses can choose the approach that fits their goals best, cash flow management is a technique all businesses engage in.

There are various mechanisms that could be used for cash flow management, which include the following:

  • accounts receivable technique
  • inventory management technique
  • account payable technique
  • credit control techniques.

For the purposes of this section, we are going to discuss the first two mechanisms before turning to two practical examples of companies using efficient inventory management systems.

Managing accounts receivable

Over time, managing accounts receivable could mean the difference between a positive net cash flow position or a negative cash flow position.

What can businesses do to ensure a positive net cash flow?

Here are three methods for improving the collection of accounts receivable.

  1. Thoroughly track accounts receivable. The sooner you are aware of late payments, the sooner you can act. Depending on the budget available, companies can choose to use accounting software or spreadsheets for this purpose.
  2. Clearly state the terms of payment and do not deviate. On every invoice, you should include a clause to mention what happens if payments are not made on time.
  3. Offer a small discount for early payment. Here the goal is to collect the payment earlier than the due date. Doing so would reduce your accounts receivable balance and free up much-needed cash.

Inventory management

Inventory management is a powerful lever to pull to improve cash flow. Most businesses manage inventory of one kind or another, and, perhaps not surprisingly, many of the challenges they face are the same.

Below is a list of four common inventory management issues followed by the best method to address each one.

Take a moment to consider each of the problems, before you read through the methods to address them

Problem: Not keeping track of sales trends in the inventory management process
You should keep track of high and low seasons to understand the movement of inventory and sales trends. Analysing how your inventory has moved in the past will enable you to get a sense of how inventory may move in the future.
Problem: Absence of methods to keep track of inventory
You could be paying much-needed cash to hold onto inventories that are not moving and are highly unlikely to sell in the future.
Consistently ordering too much or too little will result in increased costs and poor cash flow management. To assist, businesses could consider tracking software and systems such as Xero, QuickBooks, and SAP.
Problem: Purchasing too much of a product
Buying too much inventory that may not sell in the future results in overstocking. Purchase and stock lower quantities of inventory at the start.
This allows you to understand your customer’s purchasing behaviour better and then to stock accordingly.
Problem: Slower inventory processing
Slower rates of inventory processing (which are often due to inefficiency or lack of processes and systems) can result in inventory management issues.
Understanding your inventory performance will enable you to reduce the inventory fulfilment time, and it allows you to purchase products ‘just in time to supply to customers. This reduces the time inventory storage and increases turnover.
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