Cash Flow Management Mistakes to Avoid

Effective cash flow management is essential to the success of any business. Drastic action in response to a poor economy can lead to dire consequences. In order to preserve cash flow and the health of your organization, take a few simple steps and avoid common management mistakes.

Financials

The first step to controlling cash flow is taking the time to understand the financial aspect of the business. Keep accurate records so that you know what money is coming in and going out as well as where it is going. This will prevent any confusion and show you the direction of the business. However, keeping accurate records will not help you if you do not understand what they mean. Seek help if you cannot see the difference between profit, loss and cash flow.

Mismanaging credit is another deathblow for cash flow. This can occur when applying foe credit or extending credit. Do your homework before borrowing. Look for the best rates and make sure that you read the fine print. Many suppliers do charge interest, so be careful about entering into any contracts. A little Internet research should provide valuable information about the business practices of anyone you plan to do business with. Also, have a clear plan of repayment prepared before taking on debt.

Extending credit to the wrong people will also create problems with the cash flow. If possible, take the time to check the credit history of anyone to whom you extend credit. Poor credit history indicates that you might not receive your payments on time. If you choose to extend credit, have policies and procedures in place, and make sure that you adhere to them.

Accounts payable and accounts receivable need to be monitored closely. Customers who do not pay their bills on time need to be addressed. If accounts receivables are not paid on time, there is not the money to cover accounts payable. Take the appropriate steps to recover payments.

If you have the resources and the accounts receivable are going well, consider an outside accounts receivable financing company. This will limit the need for collections and provide useful discounts for the business that improve cash flow.

Too often people focus on profits rather than cash flow. Profit is important, but lack of cash flow will sink a business faster than lack of profit. If the bank account stays low the majority of the time, how is it possible to pay bills on time?

Common mistakes

The most common mistake that companies make to control cash flow is cutting the wrong expenses. This can actually lead to greater financial loss over time. Marketing and employee development is an investment in the future, if done correctly, and should not necessarily be slashed. Use the financial records to determine the company's larger and less effective expenses. For example, is it possible to find a less expensive vendor or renegotiate the current rate?

Finding ways to cut costs relates directly to the asset finance. Even in an economic downturn the assets still need to be replaced. This is a wonderful opportunity to look into leasing. It may even be possible to sell existing assets to create cash flow and lease new ones. This will inject cash into the company, although you need a clear payment plan for any leases that you take on.

Occasionally, a business will expand quickly but not have the cash flow to back up the expansion. This is called overtrading. Just because there is the opportunity for growth does not mean that it is a good idea. The time difference that it takes to make a profit on a product purchased is the problem. A growing requires using more money to purchase inventory, but if it is not replaced quickly the cash flow suffers.

Cash flow is also influenced by discounts. Offering slight discounts, such as one or two percent for paying cash or paying early can benefit cash flow. This is an incentive that will pays for both customers and business owners. The customers enjoy getting a discount and business owners are happy with the increase to their cash flow.

On the other end of the spectrum, offering large discounts on merchandise in response to a poor economy can have disastrous effects. Discounts can increase sales and liquidate excess merchandise, but it does reduce the profit margin. Consider which discount will work best for your situation. For example, buy two get one free might be more cost effective than a 50 percent discount because sales will need to double for the 50 percent discount to be effective.

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