Businesses that have no real cash flow planning system are placing their continued operations at risk. It is important to have a steady reserve of cash in hand for emergencies. Good cash flow planning involves being strict when collecting debts as well as issuing easy to read invoices. It is also a good idea to avoid selling a large amount of products on credit. Preserve cash by paying bills within a reasonable time while being careful to avoid getting bad credit.
Those who operate businesses with poor cash flow planning can quickly find themselves in deep financial trouble. In simple terms, cash comes into a business via sales of products and assets while it goes out through purchases and debts. Cash flow planning involves having enough cash on hand when it is needed.
The first step towards achieving a good cash flow is to ensure that all billing and collection operations are running smoothly. This essentially means that a business must collect all money it is owed as soon as possible. Another way to ensure customers pay is to charge either the full amount up front or a certain percentage with the rest due within a certain time frame.
It may be necessary to vigorously pursue debtors. Customers with overdue invoices must be contacted constantly and reminded of their obligation to pay. In general, the longer it takes to collect a payment, the less likely it is that the full amount will be received.
Cash flow planning usually revolves around sales. A company that increases its transactions should in theory have more cash on hand, yet this is not always the case. Sales made on credit rather than cash merely results in an increase in accounts receivable. This does not help cash flow whatsoever and results in a decrease in inventory, i.e., that more cash must be spent to replace it.
Another mistake made by sellers is to issue an invoice that is not clear. Invoices that are are ambiguous or incomplete give creditors a convenient excuse to avoid paying. They can simply say they did not understand the invoice. A carefully detailed invoice is the sign of a company that pays attention to every little detail.
Another cash flow planning strategy is to hold off making payments to other vendors for as long as possible. Avoid paying debts until the final days before fees or interest penalties are added to the cost. Any organization that follows this avenue is treading a fine line, however. Being slow or late on payments can adversely affect the credit score which could have future ramifications for the business.
