8 Ideas For Hoarding Your Cash

Let me start by saying this…

Cash flow and profitability are not the same thing.

You can be profitable but not have a positive cash flow – and you can have a positive cash flow but not be profitable. A lot of people are confused about the two terminologies without being truly aware that not understanding the difference is one of the surest paths to financial disaster. Here’s a list of ideas for hoarding your cash for that rainy day.

1. Determine the answers to three key cash-flow questions

Optimizing cash flow starts with finding the answers to these three questions:

  • First, where is your cash trapped? – Cash can be tied up in various places in your business, such as uncollected accounts receivable, unrecognized costs and inventory, and fixed assets that aren’t providing a return on your investment.
  • Second, where does cash come from and where does it go? – The best tool to help you answer this question is your cash-flow statement. If you’re having cash-flow problems, look at the past three or four years of cash-flow statements to find out what’s causing problems and what you can do to solve them.
  • Third, can you improve you existing cash position and ongoing cash flow? – Answering this question will help you devise specific strategies for improving your cash flow, including some of the strategies that follow.

2. Determine how much cash or liquidity your business needs

The answer will depend on many factors and vary from one company and industry to the next. For example, how fast do you sell your products or services? How fast do you collect from customers? How fast do you pay your suppliers? To find the right answer, you need to determine your cash conversion cycle – a guideline for liquidity that combines widely used financial rations derived from your financial statements. It will tell you how much working capital you need to run your business without running out of cash.

3. Revamp your payables procedures to hold on to cash longer

Stretch your payables as long as possible without hurting your vendors, unless you’re offered a discount for prompt payment. Take full advantage of your thirty days to pay if those are the agreed-on terms.

4. Reduce your investment in accounts receivable

Track your receivables carefully; be aware of what payments are due to you and when. State your payment terms clearly on your invoices and enforce them, and consider assessing penalties for late payments. Meanwhile, if you’re offering extended payment terms, determine whether this is generating incremental sales and/or wider margins. If not, they are reducing your profitability by tying up nonproductive cash.

5. Talk to your bank about using cash management tools

You may be able to process receipts and collect receivables faster by using bank cash management services, like lockbox, concentration accounts and electronic funds transfer (EFT). Banks offer a broad range of cash management tools that even small businesses can use to increase available cash.

6. Improve inventory management

Inventory likely represents one of your largest and most tangible investments, so it must be managed wisely. Compare your inventory levels and average inventory-turnover ratio with industry averages to see if you’re in the ballpark. Can you shift a portion of the burden of carrying inventory to your suppliers by using just-in-time inventory-management processes? If you’ve accumulated excess inventory, can you liquidate it in a bulk sale? Also, make good use of one of the many inventory-management software products.

7. Prioritize and negotiate when cash gets tight

If you find yourself in a cash-flow crunch, first prioritize your payment obligations. Legal obligations (like estimated quarterly tax payments) and payroll should come first, followed by at least minimum payments on corporate credit cards, bank loans and equity lines, insurance premiums, and auto or equipment leases. Also, don’t be afraid to communicate and negotiate with suppliers about your cash position. You may be surprised at how cooperative they can be. Billing cycles usually aren’t set in stone; most creditors and lenders will position bills in a cycle that’s beneficial for you.

8. Make contingency plans for emergency cash

Before you find yourself in a cash-flow squeeze, make contingency plans for accessing emergency cash. Liquid cash reserves in a business savings, money market, or sweep account, of course, provide the best source of emergency funds. It’s also a good idea to have a line of credit in place before you need to borrow funds, so that the money is available if and when you need it. Once you’re approved, you can access funds up to your approved credit limit by writing a check or via the Internet or a phone call. The process of making such contingency plans can you a peace of mind – and help you sleep better.

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