Five basic principles of cash management to increase accuracy for a business

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Firm of the Future Team As trusted advisors, accountants and bookkeepers, we are in a good position to advise small businesses when they are facing cash-flow issues. Not all of these strategies make sense for all businesses.

However, some combination of these can be employed by any business. In the long-term, free cash-flow, equity and debt financing are the best sources of working capital. However, these options may not be available for all businesses. In such cases, there are alternative cash-flow management strategies that small business can use to ease the strain on their working capital.

Here are some of those: Ask for a deposit or milestone payment Companies whose product or service requires substantial cash or effort before they deliver are good candidates for asking clients for a deposit or milestone payment. Graphic designers, web designers, marketing agencies, PR agencies and even construction companies fall into this bucket.

Not all clients may be willing to make a deposit or milestone payment. So, encourage your customers to ask their customers for a deposit. That might be just what they need to get on solid footing.

Ask customers to pay faster Another option for managing cash-flow is to get customers to pay faster. This can take several forms. Otherwise, the full amount is due in 30 days.

The strategy can take on a variety of forms, depending on the business. Manufacturing companies may consider using lower cost inputs to deliver the same goods or service, while a service company may opt for spending less time on the same work.

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Companies should also consider exhausting existing inventory before purchasing new inventory, or hiring part-time or contract employees to replace full-time employees. Given how much of their expenses may be personal in nature—either indirectly via the salary they pay themselves, or directly as a sole proprietor—they might want to consider what opportunities they have to cut back on their personal expenses.

It may entail eating out less, downsizing, living more frugally or delaying a vacation. Out of all the variables listed here, personal expenses are the ones business owners have the most direct control over. Getting an extra two weeks to make a payment could be the difference between missing payroll and expanding.

If your payment terms are 15 days, ask for 30 days. If they are 30 days, ask for 45 days. You have little to lose by asking again, either inquiring the same vendor or a different vendor.

Of course, the more timely and dependable you are with them, the more willing they will be to extend their terms. Finance purchase orders For manufacturing or merchandising companies that require a significant amount of cash to fulfill their purchase orders, financing purchase orders could be a solution.

Once you have a purchase order on hand, the financing company will pay the vendor so you can get the merchandise or inventory the company needs to fulfill the purchase order.

This eliminates the problem of getting a large order, but not being able to fulfill it because of cash to buy the inventory or materials. Increase margins Increasing its margins will help a business spin-off more cash that can be used to fund operations.

The only two ways a business can increase its margin are by increasing what it charges or decreasing the cost to deliver the product or service. Neither of these may be feasible for a majority of businesses. However, raising prices is a real option for businesses with strong demand for their product or service, or with a unique product, offering or value proposition that is not available from competitors.

Any increase in prices will have to be positioned carefully to avoid alienating customers.

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Sell or lease idle equipment When cash is tight, everything should be on the table. This is especially true of idle equipment that can be sold for cash or leased to another company that can put it to use. Even if the company is using the equipment, it should consider that the same equipment could be rented for much less, while the proceeds from the sale can be used to fund the business in the interim.

This especially makes sense for long-lived equipment that is easy to move, transport or install. Sell future revenue A merchant cash advance is a viable strategy for consumer businesses like retailers and restaurants.

It involves taking a loan that is automatically repaid via a percentage of the credit and debit card transaction volume received by the business. This strategy is especially viable for businesses with strong transaction history. Otherwise, they could be paving their way to financial ruin.Cash management is a broad term that refers to the collection, concentration, and disbursement of cash.

Cash Management Definition | Investopedia

The goal is to manage the cash balances of an enterprise in such a way as to maximize the. HOw a company coould use the five basic principles of cash management to increase accuracy for a business - Answered by a verified Tutor We use cookies to .

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| Ep. # Executive Summary. Reprint: RC. Executives have developed tunnel vision in their pursuit of shareholder value, focusing on short-term performance at the expense of investing in long-term growth. How could a company use the five basic principles of cash management to increase accuracy for a business Read more: Answered by a verified Tutor We use cookies to give you the best possible experience on our website.