Cash flow and working capital are important considerations for every business owner. They're especially important for companies that use heavy machinery and a variety of expensive equipment to complete their work. How can your business improve its working capital and cash flow situations to ensure availability of funds for the wide variety of planned and unpredictable expenses it encounters?
It's easy to let regular review of incoming payments and outgoing spending fall by the wayside, assuming the tracking provided by a bank is enough to monitor and spot problems. While the official record is a valuable tool for double-checking transactions, it's not enough to stay on top of anticipated spending and revenue. Business owners have to be more active.
Using a cash flow statement - a ledger that tracks money coming into and leaving a business - helps you understand exactly where and when the cash flow situation changes. Major categories to track include net earnings, additions to cash and subtractions from cash - including inventory, bills, equipment purchases and similar considerations. This level of detailed attention, where business owners can get a real-time picture of their current cash flow situation, means it's easier to catch potential issues and address them before they grow.
In many industries, it's common to have delays in both accounts receivable and payable. Although the exact number of days can vary greatly, a month or more is regularly seen in some contexts. The lag between providing services and receiving payment can put strain on cash flow and reduce available working capital, both of which are less-than-optimal outcomes for business owners.
There are a few ways to approach this issue, depending on the market a business operates in and its financial considerations. One is to simply bill clients as soon as a job is complete and request quick payment afterward. To take this strategy to the next step, you can offer discounts to those who pay their bill in a short amount of time, such as a week or 10 business days. This incentive can spur action on the part of clients and reduce the latency that can drag down the amount of available cash your business has on hand.
Purchasing heavy equipment can place a major strain on your business's cash flow, tying up working capital and making it difficult to address any number of planned and unpredictable expenses. One way to work around this concern is to lease equipment instead of purchasing it outright. Leasing creates a cost that's more manageable and predictable in the short term, spreading out the large price tag over several months or years.
Other benefits of leasing include the opportunity to enjoy some tax benefits, like expensing, even though the machinery is still owned by the lessor. There are plenty of leasing options, too, to make sure business owners find the best fit among the many choices of terms and conditions. To learn more, get in touch with Cat Financial today.