How Cash Flow Management Affects Your Profitability
If you have been seeing increases in sales volume but you aren’t seeing a proportional increase in your profits, the issue might be how you manage your cash flow. It’s entirely possible for a business to make more money than it needs and still wind up with nothing to show for it due to bad money management that creates bottlenecks in productivity and causes unnecessary late fees.
Timely Payment and Costs of Doing Business
When you establish a track record of timely payment with your suppliers, you build relationships that can lead to discounts when you buy at volume or streamlined delivery when you run low on supplies early, but if you are constantly paying late, it’s harder to stay in good standing with the companies that can do you these favors. More importantly, it will invoke penalty payment clauses in your utilities, loans, and credit lines if you have payments due and no working capital because of your own customers paying late.
Cash Flow Management Options
The key to managing cash effectively is having resources that let you meet your obligations when you have payments due but you are also waiting on payments that are incoming. There are several ways to do this, including dipping into your own cash reserves, but the most effective way is often a dedicated credit resource.
Some companies manage this with real estate bridge loans that can be paid back as payments come in. Others finance invoices directly or open credit lines that are only used when there is a temporary cash shortfall. If you do set up a reserve fund to manage your working capital, make sure it is separate from your long-term cash reserves or you will end up using your fallback burn time for everyday cash flow delays.
Streamlining Costs for Capital
Obviously, the key to maximizing your profits when you need to finance outgoing cash is to find the method that gives you the best value for your money. Often, credit lines are chosen because they have short grace periods before interest is charged, so an advance of a day or even a week might not cost anything. Others choose instruments like invoice financing because it lets them outsource a portion of their labor, adding to the value of the financing deal.
The easier you make it to pay your own bills on time when your customers pay late, the fewer unpredictable extra expenses you will have eating up your bottom line. The next step is to figure out which cash management tool fits your business model and industry the best. Often, the best way to do that is to review offerings from lenders, so start your research today.