Cash is the lifeblood of a business; it is important to have good cash flow management to ensure that the business remains a going concern. For business owners, the task of maintaining a positive cash flow can be challenging, because a business can record huge profits yet, unable to generate sufficient cash to fund working capital expenses. Cash flow is the movement of money coming into and going out of business.
Cash flow management measures how well a company manages cash (liquidity) to fund its working capital expenses. These funds are obtained from initial equity capital, contributions, proceeds of loan advances, sales, collection of receivables, etc. Thus, when business earnings are greater than their expenses, it is said to have a positive cash flow. A business is said to have a negative cash flow when its earnings are insufficient to meet its working expenses, which is unhealthy for the business.
Negative cash flow may arise from bad cash flow management among other factors. These factors may include low sales, stagnant inventory, dismissal debt collection, etc. Negative cash flow slows down business operations, future investments, and overall growth of the business. Also, the business runs the risk of insolvency as it’s unable to meet its working capital expenses, thus threatening its existence. Therefore, a business needs to have good cash flow management to maintain positive cash flow.
Cash Flow Management Tips
The following tips will help you manage your cash flow and maintain a positive cash flow.
Keep Simple, Reliable, Complete And Accurate Accounting Records
A business owner must keep simple, complete, and accurate accounting records. A simple and reliable accounting records aids the business owner in the interpretation of accounting records. Complete and accurate accounting records provide the business owner with financial data required to measure its cash flow.
These records show how funds are generated and the operating expenses covered with such funds. Also, it shows the funds available, funds generated but not available at hand (receivables), and its working capital cost. Thus, these records help the business owner in planning and maintaining positive cash flow.
Build Cash Reserves
In maintaining a positive cash flow, it is important to build a cash reserve. The entrepreneur can set aside sufficient funds to cover projected working capital and unforeseen costs. The primary aim of building cash reserves is to manage unexpected expenses caused by abnormal events.
Cash reserves can be built by collecting receivables when due as customers can take advantage of lenient policies. It can also be built by increasing sales, adjusting prices of goods and services to a competitive price.
In the short run, cash reserves can be built by tightening credit requirements. This is done by demanding customers to pay cash for goods and services. However, this is disadvantageous when done in the long run as it reduces customer loyalty. Furthermore, cash reserves can be built by carefully managing working capital expenses. Building cash reserves is also advantageous as it builds financial confidence to carry out growth expansion.
Eliminate Obsolete Inventory
Most small and medium-sized businesses make the mistake of using cash to purchase a large amount of inventory. Thus, tying up cash in inventory especially when sales do not meet the expected sales forecast. Nevertheless, selling such obsolete inventory at attractive discounts provides an infusion of cash which prevents negative cash flow. In purchasing inventory, a business should be mindful of effective sales forecasts as predicted by accounting records. Keeping inventory levels low or in proportion to forecasted sales allows you to have a good cash flow for operational expenses.
Manage Customer Payment
Managing customer payments is important for maintaining a positive cash flow. Cash inflow can be diminished by high credit sales and relaxed credit policies. Businesses are better off with a strict credit policy and low credit sales. This helps to maintain positive cash flow for the business.
This can be achieved by offering discounts on early payments, collecting outstanding payments when due. Also requiring customers to make deposits on large purchases and minimal credit sales help. However, tightening credit sometimes put a strain on customer relationship. Thus, businesses can offer special sales discounts and promos to loyal customers to maintain customer networks.
Businesses at all stages of growth must invest in capital expenditure. New businesses, which are yet to break even often make the mistake of investing heavily in capital expenditure. This can create an imbalance between short-term and long-term assets. Thus, limiting liquidity as it is tied up in the purchase of fixed assets.
To prevent such imbalance, new businesses should be shrewd when making long term capital investments. Capital investments purchased, should be proportional to the needs of the business. A good example is leasing capital expenditure rather than purchasing. Also, delaying the purchase of capital expenditure and purchasing only what is necessary can help manage cash flow.
Watch Estimated Tax Payments
Tax payments are expected expenses made to the government. Most entrepreneurs tend to ignore annual tax payments and this can be dangerous to cash flow if not carefully managed. Businesses should add upcoming tax payments to cash flow forecasts. Setting aside an estimated tax every year helps the business. This prevents being taxed with a large amount of ignored tax payments which the business may not have enough cash to pay.
Forecast Cashflow And Manage Forecast Carefully
Businesses tend to estimate the amount of money to be spent and the amount to be received over a period. This is known as cash flow forecasting. It is a plan that shows how much money a business expects to receive and pay out over a period. This plan aids the entrepreneur in making business decisions.
A cash flow forecast is important in maintaining positive cash flow; it prevents the shortage of cash, thus, preventing negative cash flow. Forecasting also aids with proper budgeting for the purchase of capital expenditure, thus, aiding wise capital investment. Cash flow forecasting is a tool for managing business resources which in turn improves business performance, returns, and growth.
Stop Focusing Exclusively On Profit
New entrepreneurs tend to focus exclusively on profit, paying little attention to cash flow. This is unhealthy for the business because decisions are profit-oriented and can hinder cash flow. Nevertheless, a focus on cash flow will, in the long run, lead to sustaining profits.
Maintaining positive cash flow is crucial to the survival and growth of the business. Other things you can do to ensure you manage your cash flow include consistent and timely invoicing, negotiating discounts with suppliers of inventory, etc. Employing these cash flow management tips would aid to build and maintain positive cash flow.
How have you been managing your cash flow in your business? We will like to hear them in the comments.
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