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Easy ways to keep the business liquid at all times

In business, cash is king, so you need a proactive cash management system to maintain your cash flow
By Henry C. Ong |

During this interesting time when business is not so good, it is important to be extra conscious of your cash flow. Your ability to generate cash flow is critical not only to the profitability of your business but also to your very own survival. You may have the best product in the industry or the best people in your sales team, but without a proactive cash management system, you run the risk of losing your business when crunch time comes.  

 

To keep the business liquid at all times, you should build up your cash reserves equivalent to at least six months of operating expenses to maintain some degree of operating leverage. This way, you will have sufficient cash to sustain the business through months of losses. If your current cash balance is not sufficient to meet this requirement, examine your sources of cash.

 

How much of your sales is on credit and how much is on cash basis? Consider shifting your sales policy towards favoring cash payments. If this is not possible, shorten your cash collection period by limiting the credit terms you give customers as well as by limiting the amount of receivables you extend. For example, you can limit the granting of 90-day credit only to selected clients. Let\\\'s say you have 20 clients with a total exposure of P750,000 that\\\'s payable to you in 90 days. If you cut the number of such clients to 10, you would have collected P375,000 on the average sooner.

 

In the same way, lower the amount of receivables you intend to finance, asking the client to pay the balance in cash. Let\\\'s say the amount of accounts receivable you normally extend to clients is P900,000. If you cut this amount down to half by requiring your clients to give a down payment, you would have collected P450,000. Of course, you may need to give discounts to clients to make your terms more attractive. You have to study the costs and benefits of implementing this kind of policy.

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Remember that your objective is to get your clients to pay as soon as possible. When you are able to collect cash for every sale that you generate, you minimize the risk of not being paid at all. Having bad debts not only affects your profitability but also eats up your working capital, thus weakening your capability to generate higher sales in the future.

 

In times like this, always remember that cash is king. When you have cash, you will not only be able to sustain your business but also acquire opportunities to strengthen your position in the market.

 


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