Small Business Series: 7 Shocking Secrets to Explode Your Business Profits!

Cash management is a crucial aspect of a business that allows the organization to control its cash flow effectively, ensuring liquidity, and maximizing the efficiency of its capital. Leveraging debt, on the other hand, involves utilizing borrowed money in a bid to increase the potential return of an investment.

The following business approach outlines how to manage cash effectively and leverage debt:

1. Cash Flow Forecasting:

The first step in cash management is to forecast your business's cash flows accurately. This involves estimating the inflows and outflows over a specified period. Accurate forecasting will help you make informed decisions about whether to invest excess cash or borrow money.

2. Cash Flow Management:

Following forecasting, the next step is to manage the cash flow efficiently. This involves keeping an eye on receivables and payables. Strategies could include accelerating receivables (e.g., through early payment incentives) and delaying payables (without damaging relationships with suppliers) to maintain a positive cash flow.

3. Cash Buffer:

Always keep a cash buffer for emergencies or unexpected opportunities. The size of the buffer will depend on the nature and volatility of your business.

4. Cash Investment:

Invest excess cash to generate returns. This could be in short-term securities, bonds, or other investments that align with the company’s risk tolerance and liquidity needs. Be aware that every investment carries risk, so diversify your portfolio to mitigate this.

5. Regular Review:

Conduct regular reviews of your cash management strategies to ensure they are still appropriate and effective.

Leveraging Debt:

Leveraging debt can be a powerful way to grow your business, but it requires careful planning and management.

1. Debt for Growth Opportunities:

Debt should ideally be used to fund growth opportunities, such as expanding into new markets, developing new products, or increasing capacity. The return from these investments should be higher than the cost of debt to ensure positive financial leverage.

2. Cost of Debt:

Always consider the cost of debt, which includes interest and fees. Aim to negotiate the best terms possible with lenders.

3. Debt Structuring:

Structure your debt appropriately. Short-term debt should be used for operational needs while long-term debt should be used for capital investments. This matching strategy ensures that the repayment schedule aligns with the cash flow generation of the financed asset.

4. Debt Servicing:

Ensure that you have the cash flow to service your debt (i.e., make regular interest and principal repayments). Defaulting on debt repayments can have serious consequences, including bankruptcy.

5. Debt Ratios:

Monitor key debt ratios, such as the debt-to-equity ratio and the interest coverage ratio. These ratios will give you an idea of your business's leverage level and its ability to service the debt.