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How to keep your business cash cycle in good balance

It is always said that cash is the lifeblood of any business and that is for a good reason. You need cash to pay your regular monthly expenses at your business such as rent for your business premises, salaries and wages, electricity and water bills as well as acquisition of inputs needed to keep your business operational. To meet all these financial obligations, you will need to strike a good balance on your cash conversion cycle in order to ensure that at any given point in time you have free cash flows to fund your business operations. The balancing act may not come automatically; and you will therefore need to be proactive and take necessary measures to ensure your business liquidity is enhanced.
How to keep your business cash cycle in good balance
Managing your free cash flows

The first intervention you need in your business is to know how to manage your free cash flows in your business bank account. This will help you to prioritise the use of your free cash flows in a manner that ensures that the funds are allocated to areas that have high returns potential for your business. It also helps you to ensure that you do not waste our free cash flows on trivial expenditures that do not add any significant value to the growth of your business.

Among the best ways to utilise your free cash flows is by investing in short-term financial instruments that offer you higher returns compared to the interest rate income from your fixed deposit account. Investing in government bills is one such option you can choose for your business. On the other hand you can opt for higher returns through online trading of forex, indices or commodities. This is a lucrative way to maximise returns from your free cash flows. You will however need to follow market analyses through SaxonTrade online channels and other similar sources of reliable market data in order to make informed trading decisions and maximise your returns. Investing your free cash flows through open ended mutual funds is also a good way to ensure you are getting returns that are higher than the prevailing inflation rate, and hence preserving the value of your money.

Managing your payables, receivables and inventory

Besides learning how to manage your free cash flows, you will also need to learn how to keep your cash conversion cycle in check. This involves ensuring that your inventory days, your payable days and your receivable days are all well aligned; in a manner that cash movement in your business is well streamlined to make sure you are able to meet your financial obligations when they fall due. The beginning point is always with your payable days, since this is the point where your cash is flowing out of your business to your creditors.

Always ensure that your payable days are stretched out as long as possible. In most cases, many creditors will offer 15, 30 or 45 payable days. However, as a matter of financial prudence, you should negotiate for longer payable days in order to ensure that you have enough time to collect your receivables from your customers and use the money to pay your creditors. It therefore naturally fits in that your receivable days should always be shorter than your payable days. This will help you to be receiving money faster than you are paying out to those whom you owe; and eventually it will improve your business liquidity and credit rating in case you want to get a business loan.

How to keep your business cash cycle in good balance
Inventories also form a very critical part in the cash conversion cycle. The higher the inventory you have stocked up in your business premises, the more cash you have trapped there; that could had been used in other more productive ways to enhance the growth of your business. Instead of having idle inventory and incur storage costs and other costs to keep the inventory in good shape; you can opt to adopt the just-in-time stock management model. Under the JIT model you will keep minimum levels of inventory and you will have more free cash flows to use in meeting your other immediate financial obligations.

In summary, to keep your business cash conversion cycle in balance, you need to negotiate for longer payable days and shorter receivable days. In addition, reduce the amount of inventory you keep at your business premises and have a way to invest your free cash flows in order to maximise your business growth.

24 Apr 2017 12:06

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