7 min read

August 29, 2022

Cash Management Tips Every Business Owner Must Know

Poor cash management can jeopardize even the most successful businesses. Take a look at how the most successful business owners manage their finances.

XanPay - cash management tips every business owner must know

Most of us already know that most new businesses fail within the first 5 years, but do we know precisely why?

According to US Bank, 82% of these enterprises went under due to cash flow problems. A highly profitable business can still collapse without a steady inflow of cash.
And this is something that every business owner, executive, and manager needs to keep in mind if they want to succeed.

Cash is the lifeblood of any business — and while rather dramatic, this is the harsh reality. Employees cannot live on air, and neither can your suppliers stay afloat with goodwill.

Hence, this is why the importance of having a healthy cash flow cannot be understated. And in this article, we're going to show you tips on maintaining a steady flow of cash.

Table of Contents

1. Identify Key Drivers Affecting Your Cash Flows

Naturally, maintaining a positive net cash flow should be a top priority. But to do so, we first need to identify and manage the key drivers affecting cash flows. Once that has been achieved we can then focus on maintaining a good, steady flow.

As a rule of thumb, every business owner should know:

  • How are billings made and collected

  • What are the key expenses

  • How are these expenses paid out

These 3 points form the basis of good cash flow management. The goal here is to calculate your business’s cash burn rate. So that way, you have a good idea of how your business is performing.

Keep in mind that every business is unique and you must take into account long-term investments and expenses.

2. Closely Monitor Payment Collections

Most entrepreneurs make the mistake of confusing profitability with cash flow. On paper, your business could be earning millions, but it's still going to fail if you're not collecting a single cent. And this is why you should never underestimate the importance of monitoring your payment collections.

One of the easiest ways to improve collections is allocating time every week to go through your list of outstanding debtors. Or, if you can afford it, hire a specialized accounts receivable (AR) clerk to monitor and follow up on outstanding collections.


3. Choose The Right Payment Gateway

Choosing the right payment gateway can work wonders for your business's cash flow. It should also maximize convenience, be cost-effective, and improve your business’s conversion rates.

For example, did you know that the average payment gateway charges between $0.05 and $0.30 per transaction? Also, don't forget to include annual fees, set up fees, and forex transaction fees. That's a significant amount of money coming out of your pocket.

This is why it's essential to shop around for the right payment platform, which supports an extensive network of customers and charges minimal fees. Which, in turn, translates into larger margins and a healthier cash flow.

Fortunately, not all payment gateways are the same; take XanPay. With XanPay, you don't have to pay anything for the first SGD 5,000 processed. And after that, you only have to pay a flat rate of 1.99% per overseas transaction and 0.6% for local transactions.

To top it all off, XanPay has zero annual and currency conversion fees and charges nothing for setting up. As an added plus, the platform offers extensive support for all types of alternative payment methods across Southeast Asia, allowing you to support a larger market while paying less.

Learn how XanPay streamlines eCommerce payments seamlessly! 
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4. Understand Your Cost Structure

From costs of goods sold to operational overheads, effective cost management is crucial to the survival of any business. But to make all this possible, a business owner will have to first decide on which costs are essential to the survival of the business.

For example, investing in a larger warehouse space may be beneficial in the long-term when sales volumes increase. But if your business hasn’t grown to such a scale, you may perhaps want to consider putting such investments on hold first.

The same can also be said for office spaces and other ancillaries. Downscaling an operation and allowing staff to work remotely is an excellent way of cutting down on overheads such as utilities and rental. Keep in mind that these are all fixed costs that must be paid at the end of every month without fail.

By removing these additional expenses i.e. trimming the fat, you’d be surprised at how much cash gets freed up.

5. Build Up A Cash Reserve

Cash flow problems rarely materialize out of thin air, and when they do, it's often the result of sudden, unplanned expenditures.

For example, an expensive piece of machinery suddenly breaks down. And as it's an integral part of your operation, you have no choice but to fork out a five-figure sum to replace it. But, your business can't afford to take the hit, and now, you don't have the cash to cover your expenses for the month.

All of this could have been avoided if you had maintained a cash reserve. Cash reserves refer to funds to cover short-term commitments and emergencies. Of course, all of this is easier said than done. Sometimes, circumstances make it impossible to hold on to any extra cash.

As a rule of thumb, a business should at least have a cash reserve that is sufficient to tide them over for a minimum of 2 months. This sum should be sufficient to cover the organization’s overhead and business expenditures for that time period.

And this is why you should consider applying for a line of credit that will give you access to a ready collection of funds. Unlike a business loan, a line of credit lets you withdraw funds as needed, and you only have to pay interest on what you've taken. This makes them ideal for covering any short-term liquidity requirements.

However, keep in mind that lines of credit do require you to pass a minimum credit score or put up some form of collateral. So, it's always better to apply for a line of credit first before you need it.

6. Invest In Accounting Software (Or An Accountant)

Quality accounting software gives you better control and oversight of your business's finances, crucial for maintaining healthy cash flows.

It makes all of this possible by allowing you to analyze financial data, make forecasts, and allocate funds as needed. Most importantly, accounting software lets you track and monitor the exact movements of the business’s cash flows. And if needed, take action to correct a particular situation.

All too often, entrepreneurs tend to neglect this critical aspect of business management due to the complexities of accounting. And while financial management is an extremely useful cash management tool, improperly managed books will only cause more difficulties.

Hence, if accounting’s not your forte, you can always consider acquiring the services of a professional accountant. These professionals have the skill and experience needed to create financial reports that will help you make the correct decision for your business.

However, we recommend that you at least acquire a basic understanding of accounting which will undoubtedly go a long way.

7. Create Financial Projections

Financial projections allow business owners to monitor and fine tune business operations. They are also essential for long-term business planning and allows you to account for any sudden cash requirements.

This is why professionals use accounting metrics to track business performance. For example:

  • Turnover Ratio = Credit Sales / Average Accounts Receivable
    Refers to how effective the business is at converting receivables into cash. The higher the ratio, the more uncollected revenue, which could contribute to cash flow problems.

  • Bad Debt Percentage = Amount of Bad Debt / Total Accounts Receivable
    Displays the percentage of revenue that goes uncollected. While a lower bad debt percentage is better, a too low number could indicate that you're losing sales by minimizing credit risks.

  • Average Days Delinquent = Days Sales Outstanding – Best Possible Days Sales Outstanding
    Indicates how long invoices are past due. Pay attention to this ratio as it is a good indicator of why your business suffers from cash flow issues.

  • Cash Conversion Cycle = DIO+DSO−DPO
    DIO: Days of inventory outstanding
    DSO: Days sales outstanding
    DPO: Days payable outstanding

CCC or the cash conversion cycle outlines the time it takes for your business to convert assets or investments into cash. If your business has a high CCC figure, it indicates that you need to speed up collections from customers.

Consider using the formulae above as KPIs for your business. If your turnover ratio is consistently high, it could indicate that there is a problem with cash collections. And reducing that figure can be one way to improve cash flows.

8. Minimize Deposit in Transit Wait Times

Deposit in transit is an accounting term that refers to funds already received and recorded by the company but not yet available for use. If you also regularly use online payment platforms, you're probably quite familiar with this as well.

The internet has made it possible for even small-time entrepreneurs to tap into the international market. For example, freelancers worldwide monetize their skills and leverage attractive forex rates by working remotely with organizations in other countries.

As most freelancers use online payment platforms to accept payments, they usually have up to 5 working days before they can access their funds. This is an unacceptable delay, especially when funds are urgently needed.

Fortunately, a new generation of payment platforms has emerged to challenge the status quo, with XanPay being one example. Unlike its competitors, funds withdrawn from XanPay are available within just 2 days with zero forex conversion fees. Hence, this makes it possible for merchants to get more of their funds faster.

Find out the top payment trends for 2023 with our detailed guide! 012023-Gated-2023 Payment predictions


9. Negotiate with vendors for maximum credit

Work closely with suppliers to obtain trade credit for your business. Doing so allows you to purchase goods on credit and gives you time to sell your inventory which helps ensure a steady flow of cash.

Trade credit is most commonly offered on 30, 60, and 90-day terms, but it is usually only provided to trusted customers. So, you'll have to build up a rapport with your vendors to earn their trust.

Naturally, this takes time and effort on your end. But you'll find that it's worth the initial sacrifice as purchasing goods on credit helps free up cash for more immediate uses.

So if you can obtain it, be sure to maximize the credit terms that have been afforded to you. But do keep in mind that purchasing goods on credit is not without its fair share of risks. If you fail to meet your obligations, your reputation with the supplier will take a hit, and they may refuse to supply you with goods.

The same also applies when extending credit to your customers. Some unscrupulous customers may abuse your credit terms and choose not to make payment, so it's more prudent to obtain a bank guarantee to safeguard your interests.


10. Restructure your inventory

Besides obtaining trade credit, another way to optimize short-term cash flows can be done by adopting the Just-In-Time (JIT) inventory management method. A business maintains minimal or zero goods at any given time, thus, keeping storage costs low while freeing up cash intended for suppliers.

Although, do keep in mind that JIT requires careful planning and a close relationship with your vendors. When correctly implemented, JIT enhances efficiency and short-term liquidity as only goods that need to be sold are purchased.

Closing Thoughts

Maintaining healthy cash flows is vital to the survival of any business — large or small. And XanPay facilitates this by providing you with quick access to your funds while charging minimal fees. With a proven track record of excellence, XanPay is your ideal partner for the future.

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