10 Cash Flow Management Tips to Avoid Bad Debt in Business

Cash flow management is a vital part of every business operation because this shows the business owner a great picture of the business finances. Cash flow management and statement show whether the business is generating enough money to cover for all the inflows and outflows of cash through its investments, payables, collectibles, and other aspects that would need to be covered by the business operations for a certain period.

With all the current and possible setbacks that a business owner may encounter when you are operating a business, what does it entail to ensure that you will have enough cash on hand and cash reserves to comply with all the needs of the business operations and to protect the business from going into debts later as a result of poor debt management within the business?

1. Anticipate the business’s future needs to avoid surprises

A business owner needs to plan for its business needs because it prepares the whole team on all aspects and possibilities that may arise in the middle of its operations. Proper and well-thought of contingency plans should also be in place for scenarios and situations that may inadvertently arise from certain situations. A good example that could be illustrated at this time would be the current pandemic that everyone is experiencing. The plan may not have been done ahead of time because no one anticipates a pandemic. But knowing about the current conditions in place, a feasible business plan may be drawn from the circumstances being faced at the moment especially if it involves cash flow management or even debt management.

Drawing up contingency plans and financial forecasts, which highly-involves the cash flow, would make the business owner more aware of all the possibilities that a certain business event might bring the business into. It is very important that business owners are not caught by surprise when they see unfavorable numbers come up because they already know what to do and they are well-aware of the measures needed to be done in order to make sure that debts will not pile up and financial obligations will be met.

2. Accounting and/or financial books should always be kept up to date

3. Know how much you need in order to break even

4. Cutting or delaying expenses

5. Turn your assets into cash

6. Optimize the use of your accounts receivables

A business’s accounts receivables are also a good way of generating cash for cash flow management concerns. First, you need to ensure that your business has a very good way of handling accounts receivables. There are small businesses who hire a separate team just to handle receivables and payables alone, mainly because they should be constantly monitoring these accounts and ensure that they are all paid in a timely manner. Your accounts receivables team, or even just your business accountant, should be able to set invoice timelines and terms that could maximize cash inflow into the business. It is also right to say that invoicing should always be done right. Even the littlest mistake, such as a transposed number or mistakes in dating the invoice, is material in the timely and correct collection of an invoice. Second, ensure that there is a timely delivery of all your invoices to your customers in order to avoid delays in payment. Timely collection of outstanding debts from customers is very vital in ensuring that your accounts receivables will be immediately converted to cash in your balance sheet, thereby, decreasing the chances of the business having cash flow issues. Draw up easy payment terms for your customers to encourage early payments which would be beneficial in helping to reflect a good cash inflow into your cash flow management plan and statement. And last but not the least, you may want to draw up discount programs and other payment options for your customers to encourage them to pay on time. Discounted and incentivized sales to your customers are proven to be effective in making sure that they pay their invoices on time because the discounts mean lesser cash outflows from their end. On the other hand, businesses should also ensure that there will also be corresponding penalties to those who will pay late or default. This is to help the business in recovering from the bad debt or losses brought about by the transaction. This way, management could still find a way to correct any cash flow interruptions this late payment or default may bring to the business.

7. Ask for deposits from customers

If, for example, the customer is unable to pay for their invoice in full, this deposit can be used to cover for the bad debts that will be incurred due to the non-payment or default by the customer. There is still cash inflow involved, though not in full, and debt management would still be under control.

8. Shrinking your cash outflows

Whatever current equipment or machinery you have that needs repair, does not need to be replaced right away. Repairs are less costly, and the cash outflow would not be as much if you would buy a new one. Upgrades to your equipment or machinery should also be carefully considered because this would entail a big cash outflow on the side of the business. No business owner would like to be deep in debt just because of an upgrade to a machine that is still delivering what its supposed to be delivering. However, if it is already absolutely necessary to upgrade your current capital equipment, there should still be careful planning about this huge expense and make sure that the business’s cash flow would not suffer in the long run. Cash flow management is also about ensuring that there is a good balance between the business needs and your external customers’ needs.

9. Increasing margins and sales and clearing out your inventory

Costing and managing inventory entail a lot of hard work and computations that is why these are specialized fields in your business’s finance team. As a business owner, you should be aware of the impact of setting a good margin for your sales in order to gain a reasonable profit from them. Increases in profit margins do not necessarily need to be too steep that you will end up having more in your inventory than having it sold and converted to cash. Profit margins are computed based on your cost of goods and inclusion of other business operations expenses such as labor, equipment, and other similar factors, and these are usually incorporated, too, in detailed cash flow management plans. The margins should be reasonable enough that you will be able to clear your inventory and restock and keep the cash inflow going. Along with this, you can drive your team to increase sales through promotions and giving incentives, not only

10. Build good connections and relationships with your vendors, suppliers, and contractors

At the end of the day, it is important for a business owner to be able to strike a balance between keeping a positive cash flow statement at the end of a given period and making sure that it will also be able to keep away from the hassles of bad debts and debt management. It may be hard to strike a balance between those two facets of business. If you have the right people and the right mindset, workable and viable cash flow management and debt management plans will not be hard to meet. The ultimate goal is for the business to be profitable with the aid of a feasible cash flow management plan to follow and to minimize or eliminate the need for a debt management plan in the long run.

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