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That makes managing cash effectively a very important part of leading a company.
However, cash flow strategies can be complicated, and they need to account for several kinds of risk.
Here are seven tips to improve your process and support your business.
Also seethe seven most profitable small business ideas for 2024.
Forecast Your Cash Flow
First, you should forecast cash flow if you arent doing so already.
This will help you identify and address risk before it impacts your business.
For example, your forecast might reveal a cash flow shortage in the fourth quarter.
If you get that information in the second quarter, it becomes much easier to address.
The multinational accounting firmPwChas a four-step process businesses can follow to forecast cash flow.
Understand Key Areas of Cash Flow Risk
Creating a cash flow forecast is a great first step.
But even the best-laid plans can go wrong often through no fault of your own.
Thats why you should also familiarize yourself with common risks in cash flow.
One idea is to prepare backup funding that you’re able to access as needed.
Maybe the simplest option is to open abusiness credit cardor revolving credit line.
Each gives you ongoing access to funds as long as you stay within your limits and pay everything back.
Without a source of backup funding, businesses must scramble to resolvesudden cash flow issues.
Its easier and much less stressful to set all of this up before you need it.
That way, money comes into your business before you need it.
If theres room for optimization, itll only benefit your business.
Delaying your purchase for five days could be beneficial from acash flow perspective.
If you oughta change how your company spends, reach out to suppliers.
Revamp Your Inventory Strategy
Its also important to consider how inventory impacts cash flow.
Each item you have in storage carries a cash value that you cant spend.
That means themore extra inventoryyou have, the more challenging cash flow management can become.
If you already have extra inventory, you may not be able to do anything about it.
But try not to accept deliveries like that in the future.
To do this, you may need to change some language in your supplier contracts.
Maintain a Reasonable Amount of Cash Reserves
Finally, dont neglect the importance of cash reserves.
Having a reserve of cash makes it much easier to deal with unexpected risks as they emerge.
The general rule is to set aside three to six months worth of operating expenses.
But consider your companys needs when deciding.
You may also want to think about thepros and consof cash reserves versus credit.
For example, holding six months worth of operating expenses in cash may be unrealistic for your business.
That way, you have to hold only three months worth of cash to manage risk.
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