How can I optimize my cash management?

A company's true oxygen, cash flow refers to the liquid assets available at any given moment. It enables the company to cover its operating costs, and is essential to its growth strategy. With only a small amount of share capital at their disposal, small and medium-sized businesses have every interest in implementing best practices to manage their financial resources. Here are our 7 tips for optimizing cash management!

Draw up a cash flow forecast 📊

Managing cash flow requires a good understanding and anticipation of cash inflows and outflows. How can you do this? With the help of a cash flow forecast, useful at the start-up and development stages.

The cash flow forecast lists past and future cash inflows and outflows over a period of 6 months to 1 year. It takes into account payment deadlines, VAT and taxes. Establish at least three scenarios: pessimistic, optimistic and normal.

This way, you know your bank balances in advance and can react accordingly. For example, you run a seasonal business and anticipate that in November, your cash flow may be a little short of what you need to meet operating requirements. Thanks to the forecast, you have time to find solutions to remedy this situation.

💡 Note: you have to incur expenses before you receive payment for your goods or services. This permanent time lag between disbursement and collection is known as working capital requirement (WCR).

Reduce overhead costs to optimize cash flow ⬇️

Overheads include the purchase of raw materials, salaries, rent for business premises, energy costs... Just because they're fixed and recurring doesn't mean you can't reduce them! For example, cut energy waste, go paperless, or move to a new location to save on rent.

Manage just-in-time inventory to improve cash flow 🔁

Inventory is a cash-intensive item, so it's important to limit it as much as possible. It can be tricky to strike the right balance between too little stock, which can't meet customer demand, and too much stock, which increases working capital.

The most practical solution is to outsource stocks to a service provider, but this is still a complicated operation for very small businesses. Instead, you can :

  • Recommend on a fixed date according to stock rotation;
  • Replenish every order if you sell perishable products, to avoid throwing away unsold stock;
  • Replenish stock each time it reaches a critical minimum threshold.

Reduce customer payment times for better cash management 📉

Late payment and non-payment are one of the most frequent causes of business difficulties. They can even lead to suspension of payments. To optimize cash management, you need to give priority to advance payments, short payment terms and careful monitoring of receivables.

There are several avenues to explore:

  • Ask customers to pay invoices within 30 days, not 45 days from the end of the month or 60 days;
  • Choose a fast payment method such as bank transfer and prohibit cheques;
  • Offer a discount or reduction to cash customers;
  • Follow up with customers as soon as the invoice due date is passed;
  • If the reminder fails, immediately initiate an amicable debt collection procedure;
  • If amicable collection fails, opt for a legal collection procedure (injunction to pay, provisional injunction or summons for payment to the fund);
  • Invoice late payment penalties and flat-rate compensation for collection costs.

💡 Good to know: you can assign your receivables to a factoring company. The factor pays you the amount within a few hours, after deducting its commission.

Increase supplier payment times 📈

If you need to get paid as quickly as possible, you'll also want to extend the due dates of your invoices. Ideally, you should be able to pay suppliers after you've received the money from your sales. And don't hesitate to ask for a discount if you can sometimes pay cash!

Reserve excess cash 💰

To manage your cash flow effectively, you also need to know how to save surpluses. Depending on the legal form of your company, you are required by law to set aside a minimum amount of reserves, representing a fraction of the share capital. These reserves may prove insufficient in the event of a downturn. By saving cash, you'll have a nest egg from which to draw if the need arises.

A final word of advice for the road

Take advantage of your healthy cash flow to negotiate a bank overdraft and a loan rate with your banker. If you have to use it, it will be under the best possible conditions!