Ideally, you want your operational cashflow to be in credit to avoid bank charges and paying for the cost of borrowing.
At the same time, you do not want a huge balance sitting in a current account that is not earning much interest and is not working for your business through being invested.
How to run a tight cashflow
To keep your cash balances in the black, a business needs to maximise the time it takes to pay suppliers without reneging on agreements or causing a stop to supplies.
The Finance Director needs to ensure that payment terms are regularly reviewed where possible.
A standard supplier contract should be drawn up that extends payment terms for most suppliers.
There will always be exceptions such as payments required for tax and payroll that have to be paid by a set date.
More efficient cash collection
The other side of the coin to keep cashflow healthy to support work in progress is to ensure that cash collection of customer balances is efficient and that debts are collected quicker than the firm is paying for its outgoings.
To help this aim, it is vital to run a credit check on new customers to reduce bad debts and to agree short payment terms initially if possible until you are happy they will pay on reasonable payment terms.
For large projects that require a lot of initial funding to complete the job, your finance director could look at setting up stage payments through milestones of the project as they are completed.
Utilise resources effectively
To keep costs down, utilise your resources effectively by careful planning and budgeting so that you don’t buy stock too early or let supplies build up.
If you have lots of spare cash, then look to deposit funds in a higher paying business savings account to earn more interest.
The benefits of running a tight cashflow
This means there is more cash available for investment in current jobs, new customers, specialist staff and marketing, which should help your business grow and it means less funds are not working for the business.
By running a tight cashflow that is in credit you avoid paying interest on loans or overdraft charges.
Accurate cashflow also makes future planning easier and more realistic.
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