An In-Depth Look of How Cash Optimization Works

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When it comes to running a business there are many different things you have to bear in mind. From marketing strategies to your workforce. Not many people have a complete financial mind when they run a business which seems strange as that’s exactly what a business is about, money. That being said, you can still understand the basics, enough to get your company going until an accountant needs to step in and take over. Planning your strategies is important, and understanding things such as cash optimization is important for the success of your business. Here we take a look at how cash optimization actually works.

What Is Cash Optimization?

Money is the backbone of your business. It’s the lifeline and when managed well, your company will grow and remain stable. When it’s poorly managed the impact is often disastrous. Cash forecasting and optimization allows you to maximise your operational efficiency whilst mitigating all risk. Those that forecast tend to have better decision making. Results require thinking, accurate identification and effective implementation of ideas.

Banks are brilliant at cash optimization as it’s essentially their entire job. They use software to ensure they are working correctly. With cash declining and the cost of distribution rising, they had to use something to optimize their cash distribution. Looking at this cash management software for banks, it’s easy to see why it was needed in the first place. It’s a complicated industry so having software that automates the process mitigates all risks.

Negotiating Payment Terms

If you’re a solo business or a retailer then it’s essential that you’re paid on time. This is an integral part of cash optimization as it keeps the cash flow healthy. You don’t want to be waiting around for money to come in as it could hinder further payments you need to make to continue supplying your product. If you have your payment terms clearly laid out in a contract then whoever you’re selling to knows and understands exactly how long they have to make payment. Those that don’t have a clear payment term can often find themselves in a financial hole with a large number of bills overdue. Make sure you follow up on these and get paid as soon as you can. The sooner the money comes in, the sooner you can continue with your business.

Monthly Cash Flow Forecasts

Completing a cash flow forecast every month is a good habit to get into. Not only does it allow you to see how much cash you have in the business, but it can also indicate how much you’ll have in the near future. With this information, you can budget for upcoming expenses, events, and consider how you’re going to reinvest back into your business.

Cash flow forecasts are a good way to truly understand how much money you have and where else you’re spending it. If you discover too much is going out in one particular area then you can optimize by reallocating your budget to a more sensible plan.

Inventory Holding Costs

If you’re selling a product then it’s safe to say you’re going to be holding some stock to ensure you have it when it’s purchased. Inventory forecasting is essential to keeping those costs as low as possible meaning cash is freed up to spend in other areas. Using an inventory management system is hugely beneficial to keeping costs down. You can accurately monitor stock levels and forecast how many units you think you might sell. Messages are sent when stock is low which means you can reorder as and when you need to. This reduces the risk of negative cash flow and other issues such as dead stock.

Sell On Multiple Channels

When running a high street store it was always seen as a single channel way of selling. That is until the internet rocked up and shook the business world. Now there are multiple ways of selling online and if you want to truly optimize your cash flow and increase your capital then you have to look at multiple ways of selling.

When it comes to social media, each platform tends to have a different demographic. Facebook is predominantly used by millennials and TikTok is mainly used by those under the age of 18. This means you have two completely separate generations to sell to. Utilise this and get as much cash coming in as possible. It’s the best way to optimise your cash flow and boost your sales.

Running a successful business isn’t easy but if you can look into how to truly optimize your cash flow then things will run a little smoother. Use software if things are starting to get a little complicated and most importantly, don’t forget to plan. Every business needs a cash plan that they can refer back to. Don’t find yourself in a sticky situation.