Making money is just half the battle. Managing it well is what keeps your business alive. Learn ins and outs of cash flow management before sudden hick-ups become irrepressible.
Imagine you have landed a big client. It takes you weeks, maybe months to fulfill their order. But - because they're so big - they dictated long payment terms on your invoice. Could you survive 90 days without their money?
Cash flow management highlights the difference between profits and cash flow. While you wouldn't take an unprofitable client, sometimes the money isn't flowing the right way.
Profit is easy to understand, if you sell shoes wholesale, you have to sell them for higher price then you bought them. As much higher to cover the cost of warehousing, packaging, shipping, and wages of your employees. But cash?
Cash is dependent on your cash cycle. Using the shoe wholesale example: You buy your shoes.You pay someone to package them. You pay your supplier after 30 days of getting shipment. You find a customer and sell them shoes, but they pay you in 45 days.
Depending on how long you shoes were on the shelves, you had to wait either 15 days for payment after you paid for everything. Or even longer.
So what to do? There are four strategies and you can use all of them at once:
1) Pay your suppliers later. Sometimes they are inclined to amend your terms, if you just reach out. 2) Ask your customers to pay you sooner. It's really easy for B2C businesses, but you can offer rebates on any invoices paid early or immediately. 3) Manage inventory carefully. Have your suppliers deliver just-in-time, if possible, or make sure you don't have excessive stock. There's whole science to working capital management, since you do not want to be too light in stock for any increased demand. 4) Tough it out. Get the money elsewhere and eventually, it will come to you. Meanwhile you can use your own money, or you can borrow from bank or other entity.
There is some art to cash flow management, when you are trying to decide which payment terms are amendable and which are on their limit. And there are scores of books written on working capital management.
Where you have almost no choice is in planning and analysing. You have to be aware of your cash flow. You have to model it, plan it, and decide, if you have enough cash to withstand the storms.