“Entrepreneurs believe that profit is what matters most in a new enterprise. But profit is secondary. Cash flow matters most.” —Peter Drucker
In terms of the financial management of a business, it is crucial to understand that cash flow is paramount.
While every business is aware of the fact that cash constitutes the core of their business, most of them fail to optimize cash flow in the best possible manner.
Why Cash Flow Management is Important?
Blame it on everyday expenses that pile on top of one another, or those out-of-the-blue, emergency expenses that emerge out of nowhere, entrepreneurs and businessmen face cash crushes on an intermittent basis.
Prior to dissecting ways in which cash flow for businesses can be maximized, it is important to grasp the nuances of cash flow as a whole. Laymen understand the term ‘cash flow’ as the amount of money that flows in and out of a business.
While this is correct to an extent, the term also encompasses timing – apart from gauging ‘how much’, it is important to take into account ‘when’ cash is flowing – whether inwards or outwards.
In order to understand this point better, let us take an example. For instance, your business might have reaped Rs. 1,00,000 of monthly revenue [profit] on paper. However, if you have an immediate product launch and you require that amount practically, right away, and you don’t have it, you will not be able to run operations critical to your business!
Processes will come to a halt, your present and future plans will suffer, and the entire organization will come to a temporary standstill. Hence, cash-flow management is also imperative for the smooth functioning of your business.
There exist two primary kinds of cash flow – positive and negative. A positive cash flow transpires when the net cash entering your business through multiple channels is more than the net amount leaving your business via expenses.
Negative cash flow is when the above-mentioned process is reversed. This is generally an indication of concern and the presence of an underlying problem.
If you’re currently experiencing negative cash flow, or are finding it difficult to maintain a healthy balance in terms of financial management, the following tips can help alleviate your situation:
5 Cash-Flow Management Tips
1# Analyse Your Break-Even Point
As a business owner, it becomes imperative for you to know when you can expect profit. This will allow you to strive for your long-term goals, which in turn, will help you predict future cash flow.
It is pretty understandable that negative cash flow, when combined with negative profits, will give way to a catastrophic situation.
To help counter this kind of scenario, it is essential for you to focus your efforts on regulating your cash flow and analyzing your break-even point. A break-even analysis is a good starting point – after all, you cannot control what you haven’t measured.
Make it a point to answer questions such as:
- How many invoices are overdue?
- How much cash can be classified in the ‘WIP’ category?
- And how much inventory is required for me to hold?
- What is the time period is involved in the extraction of cash from customers?
This, in conjunction with the help from your accounting data, will allow you to anticipate inflows and outflows of cash over an extended period of time. Start measuring every metric – the ball is in your court.
2# Alternate Between Short-Term and Long-Term Financing
Means of short-term financing, such as a line of credit or instant cash loans online, can be used to make contingency purchases. One can also utilize these means to bridge the gap between payables and receivables.
Bank or NBFC-issued business credit cards can also be used to pay clients and vendors. In today’s economy, short-term financing platforms are a-plenty, and if used judiciously, can churn maximised returns in the long run.
On the other hand, large asset purchases, which include equipment and real estate should ideally be financed with the aid of long-term loans.
It is rather unwise to fund such large expenditures with your working capital – this can only summon impending doom.
Long-term financing not only spreads over the average life of your assets but also help you preserve your working capital for crucial business operations. While you will be paying interest, this will help you secure your future and reap possible profits.
3# Quicken the Recovery of Receivables
The most foolproof method of recovering your receivables in a timely manner is to draft your bills early and collect your dues as quickly as possible.
In order to further guard yourself against late/untimely payments, make your invoices as crisp and detailed as possible, in order to avoid unwarranted to-and-fro and last-minute confusion.
Changing up your invoice frequency can also help hasten matters in your favor. Also, instead of waiting until the end of the month, it is optimal to generate an invoice as soon as the goods/services that you offer are delivered.
For bulk orders that involve a lot of time and money, consider progressive invoicing as and when you manufacture the goods or are in the process of delivering your services. For instance, you can ask for a certain sum as a deposit against the order, proceeded by a percentage of the payment at various mutually-agreed-upon project stages or milestones.
Remember, that it is quite easy to lose track of an overdue account when it warrants multiple follow-ups. Hence, frequent communication with the customer is extremely important.
Apart from that, make it easy for your customers to pay you – offer alternative payment method options that are easier to operate with, or add a payment link beneath your invoice that offers myriad options.
4# Make it a Point to Liquidate Cash Connected with Assets
If you possess equipment that is currently useless for you, it is better to do away with an obsolete inventory. You could opt for selling the same in order to generate quick cash.
Out-of-date items not only take up space but also is a waste of perfectly good capital. Sales will also allow you to garner a taxable gain, which, in turn, can be included in your tax filings.
Also, it is better to get rid of everything you do not need as customer needs evolve along with changing times and circumstances.
Always keep buffer money with you with this tactic: sell anything that is unlikely to be used over the year unless the costs to retain are minimal.
5# Create a Separate Account for your Business
A commonplace mistake associated with running a business, or a startup, is allotting one’s personal bank account as their business one.
As initial financing for any business originates from the owner’s personal account, it is understandable that they would use their personal credit/debit cards to finance their organization.
However, it is advisable to have a separate bank account for your business, along with a business credit card. Multiple credit card companies provide monthly or quarterly management reports that contain details about your purchases and expenditures. You can utilize this information to determine your cash flow budget for the following year.
In conclusion, all businesses should understand the fact that cash flow is the lifeline of their business, and without it, things are bound to degrade, shrivel, and die. Keep the cash flowing in your favor!
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Author Bio: Gulofar Ansari