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Cash flow is often the number one reason businesses struggle or fail—especially during periods of growth. Many growing businesses see increased sales but face severe cash shortages. This often happens because more resources are spent expanding operations, leaving little room for managing incoming and outgoing cash efficiently. When cash flow is poorly managed, even a profitable company can quickly find itself in trouble.
To help you avoid these pitfalls, let’s dive deep into five proven strategies to manage your cash flow effectively, so you can grow your business without the financial stress.
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1. Create and Update Cash Flow Forecasts Regularly
Imagine running your business without a clear understanding of how much cash you’ll have in the future. This is like navigating without a map. Cash flow forecasting is one of the most critical tools for financial planning, allowing you to predict when your business will experience cash surpluses or shortfalls.
Your cash flow forecast should include all expected income from sales, contracts, or loans, and subtract anticipated expenses such as payroll, taxes, and operational costs. Update this forecast monthly or even weekly if your business is experiencing rapid growth. This way, you’ll always know when to expect slow periods and can proactively plan for them by conserving cash or seeking additional funding.
For example, let’s say you anticipate a seasonal dip in sales during the winter months. By identifying this in your forecast, you can arrange for a credit line in advance to cover expenses or adjust your spending so that you’re prepared.
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2. Get Strict About Accounts Receivable
For many businesses, sales come in strong, but cash gets tied up in unpaid invoices. Delayed payments can create a liquidity crisis, making it difficult to pay vendors, staff, or invest in growth. If customers owe you money for too long, your business is essentially giving them an interest-free loan.
To avoid this, put strict policies in place for receivables. Implement payment terms like Net 30 (payment due within 30 days) or offer discounts for early payments to incentivize timely transactions. Also, use invoicing software that automatically sends reminders and alerts when invoices are overdue.
For instance, a small manufacturing company might offer a 2% discount for payment within 10 days. This not only encourages early payment but can reduce the administrative burden of chasing overdue accounts.
3. Cut Costs Where Possible Without Sacrificing Quality
As your business grows, it’s easy to let spending spiral out of control. More employees, new technology, and bigger offices might seem like necessary expenses, but if you’re not careful, they can quickly eat into your profits and affect cash flow.
Regularly review your expenses and identify areas where you can cut back without sacrificing quality. For example, is there software you’re subscribed to that your team no longer uses? Are there opportunities to renegotiate supplier contracts for better rates?
Consider the example of a digital marketing agency that grew rapidly, hiring more staff and leasing a bigger office. However, a close review of their financials revealed they could switch to a hybrid work model, allowing them to downsize their office space and save $10,000 per month—money that could be reinvested in marketing or technology.
4. Negotiate Better Payment Terms with Suppliers
Your suppliers are critical partners in your business’s growth. If cash flow is tight, one of the best ways to ease the pressure is to negotiate more favorable payment terms with them. Many suppliers are open to giving their clients extra flexibility, especially if you’ve been a long-time customer or you have a good payment history.
If your current terms require payment within 30 days, ask if they can extend it to 60 days or even 90 days. This extra time gives your business a significant cushion to collect receivables before having to pay out, which can improve your liquidity and reduce stress.
For example, a wholesale distributor might be able to negotiate 60-day terms with their key suppliers, freeing up an extra 30 days’ worth of cash to pay their bills, invest in inventory, or even expand.
5. Build a Healthy Cash Reserve
Building a cash reserve is the ultimate safety net for growing businesses. Unexpected expenses, such as equipment repairs or an unplanned market shift, can put a strain on your cash flow. Without a reserve, businesses often rely on debt, which can compound the problem.
Start by setting aside a portion of your monthly revenue. Aim to build a reserve that covers at least three to six months of operating expenses. This buffer will provide financial stability and give you the confidence to navigate growth without risking a cash flow crisis.
Take the first step by scheduling a financial audit to assess your cash flow and savings potential.
By implementing these strategies, you’ll not only improve your cash flow management but also set your business up for long-term financial stability and growth.
Summary
This blog outlines five effective strategies for managing cash flow during business growth. Key points include:
- Creating and regularly updating cash flow forecasts to predict slow periods.
- Setting strict accounts receivable policies to ensure timely payments.
- Reducing unnecessary costs without sacrificing quality.
- Negotiating better payment terms with suppliers for financial flexibility.
- Building a cash reserve to handle unexpected expenses.
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