There’s a very legitimate reason as to why cash is usually labeled ‘king’. Maintaining a steady cash flow is the one thing that keeps your company running and it’s very crucial to the survival of your business.
Cash flow is the amount of money that goes in and out of your business through income and expenditure. Think of it as somewhat of a business checking account over a certain period of time. However, most people mistake cash flow for profit, which is the excess of what you have left over having paid for all the business expenses within a particular time frame.
A healthy cash flow will keep the doors open, enable you to pay your working staff, and it allows you to invest back into the business so you can offer better and more innovative services to your clients.
Unfortunately, even when in business, cash can be very difficult to come by and any business owner can testify to this. A lot of freight company owners, at some point or the other, have found themselves in a cash crunch; a situation whereby a business lacks enough finances to operate normally and efficiently. The cash crunch could be the result of payment delays from customers or some of your fleet lying idle after having broken down. Regardless of the reason, not having a steady cash flow can hinder your business from taking up new clients and ultimately, from growing.
In this guide, we’ll look deep into how cash flow is measured, how important it is to a thriving business, and three ways that freight companies can better manage their cash flow.
How Cash Flow Is Measured
When freight companies analyze cash flow with more precision, they usually look at it in regard to operating, funding, and investing activities.
Operating cash flow is the money received or used on a freight company’s major business operations such as paying for licensing, servicing the fleet, or paying for the office rent. Investment cash flow is the money received or spent on the business such as buying new equipment or investing in other ventures that the business finds interest in. And finally, financing cash flow is the money received in the form of debt or paid out as loan servicing.
By measuring and recording cash flow, a freight business can create a cash flow statement which will provide insight into how well money is being managed. Below are a few reasons why a cash flow statement can provide very important insight to a freight company.
Why Freight Companies Need to Stay on Top of Their Cash Flow
A better understanding of a company’s cash flow can help the financial analyst analyze the average amount of money needed by the company as working capital within a certain time-set so that they can make both short-term and long-term financial plans for the business.
Here are a few more reasons why freight companies need a better understanding of their cash flow.
Know Where Their Money is Going
Analyzing your cash flow will give you a solid understanding of what is actively consuming your money. There are a lot of expenses that a freight company will pay for that do not reflect in the profit and loss statement of the company but do reflect on a cash flow statement.
For instance, if a freight company takes a business loan and is currently in the process of servicing the loan, then the payments will not reflect in the profit and loss statement of the business but will show up in the cash flow statement.
Maintain Business Relationships
If your business is experiencing troubles with its cash flow, then you might find yourself unable to pay for certain expenses. Ultimately, this will damage business relationships you have with your partners and employees.
Gaining clarity on your cash flow will help you arrange a payment plan to pay for the company’s expenses. This will help you avoid being overwhelmed with numerous bills or invoices simultaneously and more so, it will help you avoid being without the money to pay for them.
Help Make Better Business Choices and Plans for the Future
An accurate cash flow statement will help you know the right amount of money you have available. This insight is crucial as it will guide any plans or decisions you make regarding your business.
You’ll be surprised to find that even though intrinsically you may feel as if your freight business is presently in a robust position, an updated cash flow statement can show otherwise. Whatever the reason, a cash flow statement will let you know how much you have, whether invoices have been issued to clients, and what expenses you should prioritize.
Helps in the Overall Growth of the Business
Naturally, everyone who is in business is looking to expand their operations and make good money out of it. Business growth can be a really exciting time for a freight business owner. However, if you invest in business growth at the wrong time, you may experience significant issues in the long-run.
Business growth requires quite a lot of money and if you lack adequate funds to match your growth, then you’re going to experience some challenges in paying drivers, buying equipment, and renting office space.
3 Ways You Can Improve the Cash Flow of Your Freight Company
Debt financing, a healthy cash flow, and equity are great sources of working capital for funding business expansion. However, these solutions may not be available to all freight companies. Here’s a list of three strategies freight companies can implement to better manage their cash flow.
Consider Freight Factoring
A lot of freight companies have partnered with factoring companies as a faster and less complicated alternative to traditional lending options such as bank loans.
The process of receivable factoring is very simple. It involves a freight company selling its invoices to a factoring company in exchange for a cash advance. The advance is usually between 70-90% of the total invoice. After the client invoiced pays the invoice, the factoring company deducts its fees and gives the freight company the rest of the balance.
Unlike bank loans which usually take a long time to process, cash advances from factoring usually takes 24 to 48 hours to process. This allows the company to continue with its business operations normally without having to wait for weeks or even months to receive payments on the same invoices.
Try to Avoid Unreliable Clients
Running a freight business is not for the faint of heart, especially since clients may take anywhere from 30 to 90 days to make their payments. In truth, there are two kinds of slow-paying clients; the slow and unreliable and the slow but reliable.
Slow but reliable clients are usually big corporations that insist on paying invoices within a particular time frame such as 30 or 60 days. They are usually excellent clients, but their slow payment can hurt your cash flow. Slow and unreliable clients can be very unpredictable since they tend to extend their payments way beyond payment terms. Sometimes, they even fail to pay altogether leaving you with debt.
If you find yourself with an unreliable client, try to finish the payment quickly by requesting a deposit or asking for collateral as a personal guarantee. The longer they go without paying your invoice, the less likely they are to pay at all.
The best way of avoiding such clients is to run credit checks on your entire clientele base. Keep in mind that you’re extending credit although you’re working as a freight services provider. A commercial credit check can give insight into a client’s credit worthiness and any legal concerns they may be facing.
Embrace Automated Solutions to Bookkeeping
Many freight companies still use file drawers, spreadsheets, and ledgers to manage their financial records. There are, however, easier ways to go about accounting without the paperwork. Automation can have a significant impact on a freight company’s processes such as procurement and accounts payable.
Although some would argue that they’re a bit complex, perhaps the major benefit to using accounting software is that accounting functions are more user-friendly and provide a lot of detailed insight into a company’s cash flow status.
Online accounting software such as QuickBooks can help a freight business track and update their financials in real-time, which can be accessed from anywhere at any time using an internet-ready device. QuickBooks can also be used by freight companies to prepare and send personalized invoices as well as deposit money into a business account after a client makes a payment.
Read Your Numbers and Come up With an Effective Strategy
You need to gain a better understanding of your freight company’s financials so you can better manage your cash flow. Cash crunch or not, you need to always look out for ways to save money as you run your business.
Create and read through your accounts’ books, financial statements, and company reports. While doing so, keep a close eye on how much money you have in the bank, how much you owe suppliers or lenders, and how much working capital you have. Also ensure that you identify the expenses of your business and try to cut down on non-essential spending. Costs such as marketing, utilities, and fleet management are a necessary expenditure, but you could always review your insurance covers to see if there is a policy you could do without.
Hopefully, this guide will help you solve cash flow problems so that you can take your business to the next level.