Cash flow is the lifeblood of any business, but managing it can be challenging, especially in uncertain times. Your bank can be a valuable partner in helping you optimize your cash flow and avoid common pitfalls. Here are some tips on how to work with your bank to manage your cash flow effectively.
The first step to managing your cash flow is to understand how it works in your business. Your cash flow cycle is the time it takes for your money to move from your sales to your expenses and back to your bank account. You need to know how long your cycle is, what factors affect it, and how to forecast it accurately. Your bank can help you by providing tools and reports that track your cash inflows and outflows, as well as offering advice on how to improve your cash flow cycle.
A business cash flow cycle explains how cash flows in and out of a business. Usually, money streams through a business in a fairly predictable way. Finding the right balance of expenses, revenue and receivables is an important part of getting a business’s cash flow cycle right. When that balance is achieved, it allows businesses to make the right amount of purchases to continue with their operations smoothly. Receivables are promises of payment you’ve received from others. Debt is a promise you make to pay someone at a later date. To bring in more cash it’s better to speed up collections and reduce the extension of credits.
Cash flow is so much more than just the cash in the bank. That is what is available to you at that moment, but forecasting cash flow is the step that can allow you to really see the future of your business. When you look at sales and average sales value along with days it takes you to get paid from a customer, combined with expenses and how long you can hold off on paying expenses along with debt payments and owners payments, this is what cash flow truly is.
Effectively managing your business's cash flow with your bank involves staying vigilant and using available tools. Regularly monitor accounts through online banking tools to gain real-time insights into balances and transactions. Consider negotiating favorable payment terms with vendors and establishing a line of credit to navigate cash flow gaps. Maintain a cash reserve for emergencies, streamline invoicing processes to encourage prompt payments, and automate recurring payments to avoid late fees. Proactively communicate with your bank, discussing potential challenges and exploring tailored solutions. These practices, combined with budgeting and financial planning, can help ensure a healthy cash flow and strengthen your financial standing.
Your bank can also offer you a range of products and services that can help you manage your cash flow more efficiently. For example, you can use a business checking account that offers low fees, high interest, and online access. You can also use a business credit card that gives you rewards, cash back, and flexible payment options. You can also use a line of credit that allows you to borrow money when you need it and pay it back when you have excess cash. Your bank can help you choose the best products for your cash flow needs and goals.
Talk to your banker about having an appropriately sized working capital line of credit. If there is seasonality to your business, consider a structure that temporarily increases your availability when you need it most, and decreases once receivables are collected. This keeps the business owner and the bank happy.
Another way to manage your cash flow with your bank is to automate your payments and collections as much as possible. This can help you save time, reduce errors, and improve your cash flow visibility. You can use your bank's online banking platform to set up recurring payments for your bills, payroll, and taxes. You can also use your bank's merchant services to accept payments from your customers through various methods, such as credit cards, debit cards, e-checks, and mobile wallets. Your bank can help you set up and use these services securely and conveniently.
When automating your payments and collections the goal for cash flow is to get paid fast, and pay out slow. When you can reduce your accounts receivable and increase your accounts payable, you have the cash available to you for longer.
Your cash flow can also be affected by the terms you have with your suppliers and customers. You can improve your cash flow by negotiating better terms with them, such as extending your payment terms, reducing your order quantities, or offering discounts for early payments. Your bank can help you by providing references, letters of credit, or guarantees that can support your negotiations and increase your credibility.
Finally, you can manage your cash flow with your bank by planning for contingencies and opportunities. You never know when you might face a cash flow crisis or a cash flow opportunity, so you need to be prepared for both. You can use your bank's financial planning and analysis services to create a cash flow budget, identify potential risks and opportunities, and develop strategies to deal with them. Your bank can also help you by providing access to additional funding, such as loans, grants, or equity, that can help you overcome cash flow challenges or seize cash flow opportunities.
If you can open a line of credit with your bank for cash flow crisis times, this can be helpful to know that a crisis will not last more than a day or two until you can pull on the line of credit to get you through.