This is the second installment of our informational three-part series - the ultimate guide to help you lay a solid foundation in cash flow management for your wholesale business. Today, we will be discussing strategies for cash flow management that are critical to your business.
What is cash flow management?
Cash flow management refers to how an organization manages and analyzes their cash flow. It enables wholesalers and manufacturers to project the amount of cash they will have at any point in the course of their operations.
Importance of cash flow management
A recent study conducted by U.S. Bank found that 82% of business failures were due to poor cash flow management.
For wholesalers and manufacturers, cash flow management is critical as the majority of their cash is tied up in inventory. If they aren’t able to sell their inventory fast enough, they end up with a lot of stock but low levels of cash flow.
By properly managing their cash flow, wholesalers and manufacturers are able to maintain a positive cash flow. Sufficient cash on hand allows them to pay their expenses, e.g., warehouse rental fees and machinery maintenance costs, as well as invest back into the business. This is why cash flow management is of such importance for wholesale and manufacturing businesses.
Cash flow management strategies
Are you a wholesaler or manufacturer? Here are six examples of strategies for managing cash flow that can help you.
1. Cash Flow Forecasting
Cash flow forecasting is a methodology for estimating the amount of cash you expect to move in and out of your business, which includes all your expenses and income. To maximize your preparation, your cash flow forecast should ideally cover a period of 12 months. However, you can also do weekly or monthly forecasts.
As a wholesaler or manufacturer, forecasting your cash flow is crucial because it helps you:
· Project your sales volume for the year
· Project your expenditures (warehouse rentals, new machinery, maintenance costs, employee salaries, etc.)
· Determine the amount of cash you’ll have on hand at any specific time during that 12-month period
With this knowledge, you will be in a much better position to make informed business decisions.
For example: your current warehouse has become too congested for the amount of inventory you are carrying. You are considering to rent a much larger space to store your products, so you factor all the related expenses into your cash flow forecast. The figures on your forecast will then help you decide whether you can afford to rent a larger warehouse or not.
2. Invoice Factoring
Invoice factoring is a business transaction wherein you sell your invoices (accounts receivable) to another company (the factor) for a discounted lump sum of cash. Typically, 80% is paid upfront and the remaining 20% is paid once the invoices are collected. The factor becomes the new owner of your invoices as well as the bearer of the responsibility of collecting them from your customers.
Invoice factoring is beneficial for your wholesale or manufacturing business because it immediately converts your invoices into cash. You don’t have to wait for the duration of your credit term to get your money. Invoice factoring lets you transfer all the time, effort, and resources required for collecting to your factoring company.
This cash flow management technique is an excellent option to consider if your business suffers an unexpected cash flow problem.
To illustrate, let’s say you have invoices worth $10,000 that you expect to get paid within 30 days. However, one of your delivery trucks suddenly breaks down and needs major repairs worth approximately $7,000. You don’t have enough cash for the repairs so you sell your invoices to a factoring company. They purchase your invoices for a discounted rate of $9,500. Assuming the upfront payment is 80% of the rate, you’ll receive a total of $7,600. This is enough to pay for your truck’s repairs.
3. Product Sales and Accounts Receivable
Increased product sales are great for your wholesale business, but only if your customers pay promptly. Delayed payments mean delayed profit. This can create cash flow inconsistencies and lead to negative cash flow if it isn’t closely monitored.
Avoid cash flow problems by incorporating inventory management software into your current process. With the right tools, you can automate and streamline your sales and payment workflow. No more manually filling out sales and order forms and sending payment reminders. With inventory management software, you can do all of these in just a few clicks.
Keep your business finances in order by using an accounting software which is integrated into the automated inventory control systems. You can provide your customers with a convenient payment portal. Making payments simpler for your customers will incentivize them to pay on time, thereby reducing the likelihood of delayed payments.
4. Demand Planning
Excess inventory sitting on the shelves of your warehouse can cripple your cash flow. When products are not sold, you don’t profit from them. Without profit, you won’t have money to pay your expenses. Furthermore, you will not have the cash to invest back into your wholesale or manufacturing business.
This is why proper demand planning is necessary. It allows you to satisfy customer demand while at the same time helping you avoid high levels of inventory.
When you forecast customer demand, it should be accurate. Achieving this requires you to analyze a significant amount of data, which can be difficult to do manually.
For easier analysis and smarter decision-making, turn to an automated inventory reporting tool. It provides you with a highly detailed inventory report that can be broken down into specific parameters that you set. It also helps you track any movement in your inventory in real time, which helps you analyze your inventory. With this information at your disposal, you’ll gain the insight necessary to make better inventory management decisions and avoid stocking up on too many products.
5. Invoicing and Delivery Processing
Accurate invoice creation and prompt product delivery are essential not only for managing cash flow, but also for maintaining a positive customer experience. Neglecting these two aspects of your wholesale business will likely make your customers unhappy.
If you’re a wholesaler who does invoices and processes deliveries manually, then you need a different strategy. Doing things manually requires more work, which means higher expenses, as well as more mistakes. Over time, this can eat into your profits and, inevitably, your cash flow.
By using wholesale inventory management software, you can eliminate human errors that come with manual work, saving you time and reducing your expenses for better cash flow.
Inventory management software also streamlines the order process from the ordering stage right up to delivery. It makes it easier for you to manage orders by giving you a real-time view of every stage of the ordering process. If a customer has any problems with their order, your inventory management software should alert you immediately.
6. Maintaining a Cash Reserve
Keeping a sufficient amount of cash in reserve is important for a wholesale or manufacturing business. It will provide you with the money you need to pay the salaries of your employees and your business expenses when customers don’t pay on time. Having a cash reserve also helps to keep your business afloat during hard times when sales are low.
If you are not currently maintaining a cash reserve for your business, then it’s time to start working toward one. The question then becomes: “How do you build a cash reserve and how much should you keep?”
Starting a cash reserve is pretty straightforward. You simply allocate a portion of your profits every month to your cash reserve and keep it in a separate bank account, similar to how individuals maintain savings accounts. Continue building on this reserve until you’ve reached your required amount.
With regard to how much you should maintain, the answer isn’t the same for every wholesaler or manufacturer. It depends on your specific situation. However, you should ideally have at least three to six months’ worth of expenses in your reserve. If your monthly expenses are around $50,000, then you should target a minimum three-month cash reserve of $150,000 or, ideally, a six-month cash reserve of $300,000.
Improve your cash flow by integrating Sweet’s inventory management, sales, and payment software into your cash flow strategies. It can help you implement your strategies by automating your sales and order processes so that collecting from your customers becomes more streamlined.
Our technology is also integrated with accounting software such as QuickBooks and payment software like Shopify and Stripe. They can be used to provide your clients with a convenient payment portal, ensuring that they pay you on time, all the time.
To find out how Sweet can help you, request a free demo today.