CASH MANAGEMENT OF YOUR NEW COMPANY

MANAGE YOUR LIQUIDITY

Accelerate your business with these expert tips "Cash Management of your start-up. Manage your liquidity". Take a look and discover this TIP!

Cash Management

Cash flow management is the process of monitor, analyse and optimise a company's cash flow. The objective is to ensure that the company has sufficient liquidity to meet its short and long-term financial obligations, as well as to finance its growth and expansion. Cash flow management involves projecting future cash flows, identifying key revenue and cost drivers, and implementing strategies to maximise revenues and reduce costs. It may also involve the use of financial tools and techniques, such as inventory management, optimisation of accounts receivable and payable, and efficient use of financial resources. Good cash flow management is essential for the long-term success of any business, especially for growth-stage companies or those operating in industries with long or seasonal sales cycles.

What can affect a company's cash flow?

A company's cash flow can be affected by a number of factors, among which we can highlight:

1. Sales: Receipts from sales to customers are the only source of revenue for a company (for viability analysis it is not necessary to include loan proceeds or any other source of financing) and therefore have a direct impact on cash flow. If sales increase, so does cash flow.
2. Collections and payments: The speed with which the company collects from its customers and pays its suppliers affects cash flow. If the company takes a long time to get paid or has to pay its invoices quickly, it may have cash flow problems.
3. Investments: Investments in fixed assets, such as machinery or buildings, can require a large amount of money. These investments affect cash flow by reducing the company's available cash.
4. Financing: Financing, such as loans or equity issues, also affects a company's financial cash flow (but does not affect free cash flow or operating cash flow). Money received in these ways increases cash flow, but the payment of interest or dividends reduces cash on hand.
5. Taxes: Taxes payable by the company also affect cash flow, as they reduce cash on hand.

How can a company's cash flow be improved?

There are several ways to improve a company's cash flow, some of them are:

1. Accelerate the collection of invoices: may offer discounts for early payment or establish stricter collection policies.
2. Negotiate better payment terms with suppliers: may try to lengthen payment terms with your suppliers to gain more time to pay your invoices.
3. Reduce costs: may try to reduce fixed costs, cut unnecessary expenses, or renegotiate prices with suppliers.
4. Improve inventory management: can improve inventory management to avoid overstocking and minimise the impact of associated costs.
5. Seek new sources of funding: may seek new sources of funding, such as loans, lines of credit or investors, in order to have more cash flow.
6. Maximising return on assets: can maximise the profitability of assets, such as inventories or machinery, to generate more revenue and increase cash flow.
7. Long-term budget planning: can establish a long-term budget to anticipate cash flow problems and take preventive measures.

Why is it important to take the cash cycle into account in the cash flow calculation?

It is important to take the cash cycle into account in the cash flow calculation because the cash cycle reflects the time from when the company invests money to purchase raw materials or inventory until it receives money from customers for the sale of products or services. This The time horizon can be very significant in a company's cash flow and can have a negative impact on its ability to pay suppliers, meet its debt obligations and keep sufficient cash in reserve. By taking into account the cash cycle in the calculation of cash flow, the company can identify areas where it can reduce supplier payment terms, improve its inventory conversion cycle and accelerate customer invoicing and collection, which can improve the company's financial health and its ability to finance its operations and growth projects.

What strategies can help a company better manage its cash flow?

There are several strategies that can help a company better manage its cash flow:

1. Timely invoicing and collection: It is important to invoice on time and to follow up on outstanding payments rigorously in order to collect as soon as possible.
2. Negotiation of payment terms: Where possible, more favourable payment terms can be negotiated with suppliers and customers in order to have more room for manoeuvre in cash flow management.
3. Cost reduction: Reviewing expenses and reducing those that are not essential can also improve cash flow.
4. Inventory control: Good inventory management can prevent the accumulation of surplus stock that is not sold and generates unnecessary costs.
5. Adequate funding: The company must seek appropriate financing to cover short-term cash flow needs. It is important to analyse the different financing options and select the most suitable one.
6. Financial planning: Proper financial planning can help a company anticipate cash flow needs and make decisions in advance to improve the company's financial health.
7. Profitability analysis by customer and product: Knowing which products or customers generate the most profitability and focusing on them can help improve the company's cash flow.

In general, aight cash flow management and proper financial planning are essential to maintain the financial health of the company and ensure its long-term viability. One of the main reasons why many entrepreneurs and entrepreneurship startups (+), are forced to close their business, it is because of a break in the cash flow. So that this does not happen to you, you will have to be very clear that the word INCOME does not mean the same as the word COLLECTION and that the word EXPENDITURE does not mean the same as the word PAYMENT.

Cash management techniques

Some cash management techniques that can help improve a company's cash flow are:

1. Cash flow projection and monitoring: This makes it possible to anticipate potential liquidity problems and take preventive measures.
2. Establishment of collection and payment policies: Shorter payment terms can be set for customers who do not pay on time, and longer payment terms can be set for suppliers.
3. Negotiation of payment terms with suppliers: better payment terms can be negotiated with suppliers to align incoming and outgoing cash flows.
4. Use of technology: Cash management tools are available to automate processes and improve cash flow visibility.
5. Cost reduction: reducing fixed and variable costs can help improve cash flow and increase profitability.
6. Adequate funding: ensure that it has adequate funding for the business and evaluate financing options to meet short and long-term cash needs.
7. Tax planning: plan the tax burden adequately to avoid liquidity problems in the future.
8. Inventory management: Maintaining adequate inventory levels and avoiding obsolete inventory can help improve cash flow.
9. Debt management: managing debts properly and avoiding excessive indebtedness can help maintain the financial health of the business.
10. Income diversification: Diversifying revenue sources can help reduce dependence on a single customer or product and improve the financial stability of the business.

Some cash management techniques that can help new businesses better manage their cash flow are:

1. Forecast cash flows: it is important to project future income and expenditure in order to know in advance when additional funds will be needed and to avoid unpleasant surprises.
2. Optimise the cash cycle: reducing the time between payment from suppliers and collection from customers can help improve cash flow.
3. Negotiate payment deadlines: It is important to negotiate longer payment terms with suppliers to allow more time to pay invoices and avoid liquidity problems.
4. Control expenditure: Reducing unnecessary expenses can help improve cash flow.
5. Diversify income: Not relying on a single customer or a single product can reduce the risk of cash flow problems if that customer or product is lost.
6. Maintain a good relationship with banks: Banks can be a source of short-term financing if a loan is needed to cover unforeseen expenses.
7. Use cash management tools: There are tools available to manage cash flow, such as accounting software and financial planning software, which can help control business income and expenses.
8. Maintain constant control of cash flow: It is important to monitor cash flow on a regular basis to detect any problems early and take steps to correct them.
9. Avoid overdrawing the bank account: Overdrawing your bank account can lead to additional costs and liquidity problems. It is important to control your bank account balance and not to spend more than you have available.
10. Long-term expenditure planning: It is important to plan for long-term expenses to avoid surprises and to ensure that you have enough cash available to cover them when they arrive.

Cash management tools

Some cash management tools that can be useful for a company are:

1. Treasury management software: There are a number of software options that allow companies to manage their cash flow, track their bank accounts, perform cash forecasting and perform financial analysis.
2. Billing and collection system: Having an automated invoicing and collection system in place allows businesses to reduce the time it takes to receive payments and to control cash flow more effectively.
3. Payment management services: Companies such as PayPal, Stripe or TransferWise offer international payment and transfer services that can help businesses reduce costs and improve efficiency in managing their cash flow.
4. Business credit cards: Business credit cards enable companies to make purchases and payments quickly and securely, as well as making it easier to manage expenses and offering financing options.
5. Virtual bank accounts: These accounts allow companies to segregate their funds and manage their income and expenses more efficiently, as well as provide cash flow analysis and monitoring tools.

It is important to note that each company has specific needs and objectives, so it is advisable to carefully evaluate each tool before implementing it in your cash management process.

Practical examples of cash management in start-ups

Here are some practical examples of how cash management can be implemented in a new company:

1. Monitor and control expenditure: It is important to keep a detailed record of all expenses and ensure that they are within budget. This can be achieved by using expense tracking tools and creating a detailed budget that is regularly updated.
2. Negotiate payment deadlines: It is common for suppliers to offer payment terms, which means that payments for certain expenses can be delayed until more cash is available. However, it is important to negotiate payment terms that are reasonable and do not negatively affect the relationship with suppliers.
3. Offer early payment incentives: On the other hand, if the business is receiving payments from customers, incentives can be offered for those who pay early, such as discounts on future purchases. This can help improve cash flow in the short term.
4. Use treasury management tools: Treasury management tools are available that can help companies forecast cash flows and make informed decisions about company finances. These tools can provide detailed reports on cash flow, bank balances, forecasts and other key indicators.
5. Diversify sources of funding: If the company needs additional funding, it is important to diversify funding sources. This can include bank loans, private investors, crowdfunding, among others. Diversifying funding sources can help mitigate risk and ensure that the business has access to cash when needed.
6. Reduce the cash cycle: The cash cycle refers to the time from the time an investment is made in a product or service until the corresponding payment is received from the customer. One way to reduce the cash cycle is to speed up the invoicing and collection process, such as by offering electronic payments or automatic collections.
7. Inventory control: Maintaining an efficient inventory can help reduce costs and improve cash flow. This can be achieved by implementing an inventory management system that allows tracking of inventory levels and forecasting future needs.

These are just some of the techniques and tools that can help start-ups improve their cash management and ensure that their cash flow is optimal to ensure business continuity.

Case study on cash management in a new company

Suppose we have a company that has just started operating in the technology services sector. The company has a team of 5 employees and has managed to attract its first customers, which means that it already has some revenue. However, the company is still at an early stage and does not have a solid cash flow. In addition, the company has identified some major expenses that it will have to face in the coming months, such as hiring more staff, paying bills, renting an office, among others.

To cope with these expenses, the company decides to implement some cash management techniques. First, it reviews its accounts receivable and realises that there are some customers who have not paid their invoices. The company decides to contact these customers to request payment and sets a maximum deadline of 30 days to receive payment. It also decides to implement an invoice tracking system to ensure that outstanding invoices are constantly being tracked and collected on time.

In addition, the company decides to reduce costs where possible. To this end, it decides to reduce the number of overtime hours and to work on a cost-cutting plan in areas such as marketing and advertising. Finally, the company decides to explore financing options to raise additional capital if needed. To do so, it investigates options such as bank loans, crowdfunding and startup accelerators. With these cash management techniques, the company is able to better manage its cash flow, reduce costs and ensure that it has sufficient capital to meet its short-term expenses and continue to grow.