Cash flow crunches are easily the most common problem faced by owners of small and medium-sized businesses. In addition to being stressful to deal with, problems with cash flow management can also have a severe impact on the success or failure of your enterprise.
Understanding the Basics of Cash Flow
Many business owners avoid dealing with the topic of cash flow, either because they think it’s too complicated or don’t know exactly how it affects the business.
Basically, it’s a matter of ensuring there’s more cash coming in than going out, and there are two basic types of cash flow:
- Positive – This is where the amount of cash coming in from accounts receivables or sales is higher than the amount being spent on salaries, utilities, accounts payables and other ongoing expenses.
- Negative – This is the opposite of positive cash flow, where more cash is leaving your business than entering it. This can affect inventory management, delivery timeframes and overall sales.
For effectively managing cash flow in business, you need to start tracking cash flow on a weekly, monthly and quarterly basis.
Preventing and Fixing Common Cash Flow Mistakes
Here are the top 8 ways to prevent cash flow mistakes and correct them when they happen:
- Analyze Your Cash Flow – You can’t really control any aspect of finances that you haven’t measured. Know how much working capital you need and have used, the time difference between paying suppliers and receiving payments, and which incoming payments are late.
- Don’t Focus on Profits – You could be earning high profits but still face a cash flow crunch, since many other factors are involved. Avoid thinking that your profit and loss statement can give you the complete picture of cash flow management in your business.
- But, Set a Target – You need to be aware of the breakeven point after which you will start earning profits. This will not have a direct impact on your cash flow but gives you a target figure to aim for during the initial stages of getting your business off the ground.
- Increase Incoming Cash – To help your business bring in more cash, consider raising the rates you charge for goods and services, and start taking partial payments upfront if possible. While launching new products, don’t forget about existing bestsellers!
- Control Outgoing Cash – Negotiate better payment terms with vendors and try to maintain just as much inventory as you actually need. Follow a payment schedule for recurring expenses such as utilities and phone bills and use credit instead of cash for these.
- Explore Financing Options – A business credit card or personal line of credit can help you reduce cash outflow on recurring or irregular expenses. Long-term financing through a business loan is more effective for large purchases such as equipment or property.
- Shorten the Time Gap – The gap between payables and receivables is critical to cash flow, so work on reducing it. Delay outgoing payments as much as you can without incurring penalties and send clients clear and detailed bills early to speed up incoming payments.
- Liquidate Some Assets – If you’re facing a cash flow crunch, consider selling obsolete equipment or excess inventory. Cash tied up in unused assets does not help your business, especially if you can get a decent sum of money for something you may never use!
Best Practices for Managing Cash Flow in Business
Some of the best ways to maintain a healthy cash flow include:
- Using separate band accounts, credit cards and lines of credit for business expenses and earnings.
- Identifying risks such as surges in demand and preparing for these challenges before you face them.
- Keeping a financial safety net ready for emergencies, e.g. a line of credit that offers quick cash loans.
- Helping money grow by leaving it in interest-earning savings accounts for as long as possible every month.
- Monitoring business assets, investments and inventory to eliminate waste and free up operating capital.
Take a good look at your cash flow and start taking necessary measures to improve it at the earliest. If you haven’t already done so, implement a system that helps you monitor and control cash flow more efficiently!
About the author: Shiv Nanda is a financial analyst who currently lives in Bangalore and works with MoneyTap, India’s first app-based credit-line. Shiv eats, breathes and sleeps finance, to the dismay of friends who’ve endured unsolicited advice on their investment choices, budgeting skills, or lack thereof. Luckily for them, Shiv has diverted this energy toward writing about various financial topics online. He loves it when people actually ask him for advice, so email him your questions at shiv@moneytap.com. He’ll try not to get carried away with the answers!
You might also like:
