How to Master the Art of Cash Flow Management

November 23, 2011

A profitable business can be growing, and yet it can go bankrupt. How can this happen? Often, it's because the company has failed to master the art of cash flow management. This is why companies must be diligent about watching cash flow, and more so in today's economic times.

What's happening to these cash-strapped successful companies, especially fast growing ones, is they need to make purchases in advance of doing the work and getting paid. Otherwise, how else can they support growth? Furthermore, growing companies have to pay more for insurance, taxes and other costs.

To make up the difference, a company can seek a bank loan or explore another option like invoice financing. Being extra vigilant about managing cash flow may help avoid the need for financing. It also helps to put six month's worth of operating costs in reserves as those rainy days have hitting many companies this past year.

Here are seven ways to master the art of cash flow management so you can grow without the pains.

1. Know your expenses.

Conduct a break-even analysis on at least a yearly basis to understand exactly how much it costs to run the business and deliver products or services to customers.

2. Look for savings in expenses.

It's always possible to find savings by doing a twice-a-year evaluation of your fixed expenses and variable costs. For ideas on cutting expenses, see How to Find More Cash without New Customers and 6 More Ways to Improve Cash Flow. Keep those expenses taut at all times no matter how the economy behaves.

3. Make cash flow forecasting a priority.

This shouldn't be a "whenever I get around to it" activity. Cash flow forecasting lets you know when your incoming and outgoing cash tightens so you can fix it before it becomes a problem. Work with an accountant or bookkeeper to create and maintain a cash flow statement.

4. Watch for high-risk clients.

You can do a credit check on a prospective client before your company starts work. Review your current client list for customers who pay late and address the issue. You might consider firing the client or renegotiating the contract.

5. Bill more often.

This only applies to services companies. The typical company bills on a monthly basis. What if you switch to weekly or every other week invoicing? Getting paid more often means getting money faster putting you in better shape to handle upcoming expenses.

6. Diversify your clients.

If the bulk of your income comes from one client, how will it affect your business if you lose the client? Anything can happen in this crafty economy. Work to have multiple clients so that one leaving won't put your company in a bind.

7. Trim your products or services for highest profitability and quality.

Sometimes offering too many services harms more than helps. You spread your employees and resources across too many areas. Better to focus on the areas they excel at and improve those. Review your offerings and identify high and low margin items. It may be time to drop the low margins or revamp them.

Becoming a sensei in cash flow management ensures you stay in business, attract lenders, weather every kind of economic storm and handle surprises.

What other ways can you better manage cash flow? What works well for you?