By: Mohammed Al-Baz
The American Deposit Management Co has conducted a study on various businesses to determine the main reason of their failure. The study explained that 82% of businesses, involved in the study, failed within their first five years due to lack of an effective cash flow policy.
I truly believe in this statistic; because even if you have the best product and the most successful marketing plan, your inability to manage your financial operations and forecast your revenues and expenses will weaken your ability to continue, especially during crises.
The lack of a successful cash flow policy will not allow you to effectively continue spending on your operations.
How do you apply an effective cash flow strategy?
1-Start by analyzing the current cash flow policy in order to identify revenue sources. Then analyze the gaps in your policy, and potential changes that can be made and consequently improve its weaknesses.
2-Don’t look down and develop a long-term financial plan in which you carefully manage your expenses. Pay attention to the various financial risks that your project may encounter, as well as your aspirations for growth and necessary expenses.
3-Get rid of unnecessary stuff and only spend on priorities, especially if your project is in its early stages.
4-Ensure that you have sufficient cash reserve in order to face emergencies and financial crises such as changing market conditions, global crises, and declining revenues. Furthermore, it is significant to allocate a sufficient portion of your revenues to cover the operating expenses for several months; until you overcome any future crisis.
5-Develop an effective billing and collection strategy based on boosting the efficiency of the billing process and designing strict procedures to smoothly and quickly collect your due payments. This strategy will help you avoid any disruption that may negatively affect your ability to manage your cash flows. You can also reduce the debt collection period by offering discounts to your customers if they pay early.
6-Promote your relationships with suppliers in order to have smooth negotiations with them over more flexible payment terms. This gives you more time to manage your cash flow effectively without affecting your operations.
7-Evaluate your customers carefully especially when it comes to their creditworthiness to reduce the risk of late collection.
8-Depend on a successful inventory management through designing an effective demand forecasting strategy. Therefore, you can store the right quantities and consequently reduce storage costs and the risk of damaged products due to being stored for a long time. Moreover, it speeds up the movement of products through the supply chain and decreases the time your capital is held in inventory.
9-Do not rely on one source of revenue and permanently diversify your type of products, services, and customer base. This not only increases your income streams, but also reduces cash flow management risks.
10-Monitor your financial commitments and make sure to pay them on time, to avoid their accumulation or increasing interest because this negatively affects the cash flow of your project in the future.
11-Review your financial plan from time to time and constantly update it based on the actual performance of the project and the economic conditions.
12-Hire a financial advisor who has the necessary experience to help you manage your financial operations and improve cash flow management efficiently.
If you apply these policies, you will actually succeed in managing your project, achieving its objectives, and avoiding any current or future risks.
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