4 Cash Flow Planning Tips to Ensure a healthy business

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Last year, the pandemic and subsequent business restrictions and supply chain interruptions stressed cash flow streams for many businesses. In fact, a recent survey states that the “interruption to cash flow” was the greatest problem experienced by businesses.

So, now that many businesses have reopened across the region and states have largely dropped restrictions, assessing the financial health of your own operation and creating a post-COVID business plan will be key for moving forward.

Part of that plan should be to evaluate your cash flow situation. To help you get started, consider these practical tips for long-term planning.

1. Prepare a detailed monthly projection of your cash flow for the next 12 months

It doesn’t have to be a fancy document, but should forecast the inflows and outflows of cash every month. If you need help, reach out to your CPA. You can also get free advice from a local chapter of Senior Corps of Retired Executives here: SCORE.

You can’t improve your cash flow unless you have a starting point. Measure it and see where the risks are. This is especially important if your business is growing quickly, because it’s easy to think that everything is going great. However, this is one of the most dangerous times in a small business. Rapid growth can tie up your cash in higher levels of account receivables, inventory, and other expenses, slowing revenues.

A good cash flow forecast, however, can uncover some of the potential risks in your cash flow cycle while you still have time to address them. It can also help you plan ahead for purchases you may need to make or fund major seasonal expenses. The key is to address any potential monthly shortfalls before they become a crisis.

2. Review and enforce your collections and payables process

It sounds easy: collect faster and delay account payables without jeopardizing your vendor relationships. When customers delay paying you, they are using your cash, which means you need to find the cash you need elsewhere. That may mean having to borrow (which costs you money) or delaying your payables (which compromises your reputation and can also cost you money).

Accessing payable and receivable information so that treasury and payment departments can conduct business remotely and efficiently and still get timely reporting was critical under COVID-19 quarantines. Even if you don’t have a lot of power to improve this area of your business, make sure you track trends so you can respond to specific circumstances that may arise in the future. For example, today’s digital solutions make it possible to capture cost savings and other efficiencies over processing paper checks.

3. Ensure that your line of credit is being used appropriately each month

Make sure you are not using your line of credit for long-term purposes, but only to offset short-term cash flow swings. If you are reviewing your cash flow forecast routinely, you should be able to know when your line of credit is going to be advanced, and, even more important, when it is going to be repaid.

4. Select a banking partner who understands your cash flow cycle

Make sure that your banker understands your cash flow cycle so that he or she can make recommendations that are in sync with your needs.

Do you have the right mix of short and long-term financing? This conversation with your banker is important not only in relation to your borrowing needs, but also regarding how you use your deposit account to facilitate collections and disbursements. Your banker should be able to provide solutions that are efficient, cost effective, and can result in real cash flow benefits.

Strong cash flow is essential for a successful business. A little bit of planning and focus can make a big difference in getting your business to stay strong and healthy.

The opinions and views in this blog post are those of the authors and are not intended to provide specific advice or recommendations for any individual. Please consult professional advisors with regard to your individual situation.

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General Disclosures

The opinions and views in this blog post are those of the authors, and are not intended to provide specific advice or recommendations for any individual. Please consult professional advisors with regard to your individual situation.