One of the most common causes of business failure is cash flow problems and learning to effectively manage this challenge is called “cash flow management.” Think of cash flow management as the balance you strike between paying vendors, expenses and employees and collecting payments from your customers. The movement of funds in and out of your pallet business is your cash flow and consistently avoiding negative cash flow is accomplished by maintaining smart cash flow management.
Smart cash flow management doesn’t happen by accident and starts with focusing on and maintaining one basic discipline – which is “maximizing cash flow.” You do this by making sure that invoicing and collections are as efficient as possible. In other words, the faster you invoice and the faster you collect, the better off your pallet business will be. Bill your customers promptly and follow up on overdue invoices as aggressively as you can without jeopardizing your relationship with the customer.
Other ways to maximize cash flow:
• Offer discounts for faster payment (if margins allow).
• Ask for deposits on larger orders or projects
• Tighten payment terms
The other side of the cash flow management equation is managing cash outflow or payables. Of course, watch and analyze your expenses to look for obvious ways to reduce your costs. Here are some other tips for managing cash outflow:
• Take advantage of creditor payment terms and if a payment is due in 30 days, don’t pay sooner than 30 days.
• Use EFT or electronic funds transfers to pay vendors at the last possible moment to retain use of cash as long as possible.
• Evaluate vendors on their payment terms and not just their prices. The vendor offering bargain prices might have unfavorable payment terms and your cashflow would then be better served by working with a vendor that has more generous payment terms.
If you are doing a good job of covering the basics of cash flow management then you can begin tackling more sophisticated aspects for cashflow management to improve business performance and reduce risk at your pallet business. Here are some ideas to focus on:
• Know how much cash you really have right now by keeping a daily and accurate cash balance.
• Develop accurate cash flow projections for defined periods of time into the future, 3-months, 6-moths and 12-months
• Prepare for a cash crisis before it happens by building a cash reserve or arranging for lines of credit before you need them.
One other option to improve cash flow is, of course, increasing your sales and undoubtedly your pallet business is always looking for ways to do that. However, if you really do have cash flow management problems, increasing sales may simply magnify those problems. That’s why many accounting and profit optimization consultants advise clearing up your cash flow management issues before diving into major sales expansions.
Cash is king as the old saying goes! In many cases it’s more important than any tool, plus maintaining a good cash position for your pallet business will also give you peace of mind in good times and bad.
