Effectively Managing Your Cash Flow: Key Tips Every Company Can Use
Short term cash flows are the bedrock of successful business operations, both large and small. Cash flow is like the oil that keeps the wheels turning smoothly. Firms with positive cash flows thrive. Those with negative cash flows often find it hard to survive. Here is a look at some simple tweaks that entrepreneurs can employ to improve their cash positions and liquidity.
Cash flow matters
A firm’s cash position is a measure of how much money is available for immediate release. Cash flow describes how money flows into and out of the business. Research conducted by US Bank and published on a partner site of the US Small Business Administration perfectly illustrates the criticality of cash flows. The study found that 82% of all businesses that shut shop have to do so because of poorly managing their cash flows. The survival of startup companies depends largely on their ability to maintain positive cash flows during their initial years.
Liquidity enables businesses to pay their vendors and creditors on time. Positive cash flow allows employers to pay their employees and keep them motivated. To maintain positive cash flows companies must get their receivables from clients in a planned and timely fashion.
Tracking your cash flow is the first step to managing it. A cash flow statement lists all items that pertain to expenses and revenues. It helps recognize patterns in revenues earned and expenses incurred. Cash flow statements simplify the process of short-term financial planning. Depending on the size and scale of business, cash flow statements can be prepared on a daily, weekly, or monthly basis.
If something is mismanaged the cash flow statement indicates a shortfall. This warrants immediate attention from business owners. They must identify where they are losing money, and take steps to plug the leaks. Millions of migrant entrepreneurs manage their cash flows via international money transfers. Keeping a close watch on the cash flow is particularly important for these enterprising expats. The cash flow statements of well-managed firms often reflect a surplus. Owners can accumulate the surplus cash and utilize it for profitable investments.
Invoicing and receivables
These are relevant to money flowing in. Invoicing clients on time is important. The invoicing process must be swift and efficient. Many firms now opt for semi-automated cloud-based invoicing solutions. Freshbooks, Sage Business Accounting, and Zoho Books are some examples of popular services.
Businesses can also find ways to minimize delays at the client end. Offering small discounts to customers for early payment can be a great way to speed up receivables. Conversely numerous firms levy fines for late payments. Punitive fines for delayed payment are not a strategy for making extra cash. Rather it is about ensuring that invoices are paid on time. To this effect numerous firms send periodic payment reminders.
Maintaining accurate and up-to-date cash flow statements certainly helps. Reducing cash outflows is as important as ensuring timely inflows. Many businesses have room for optimization in their operating expenses. Companies can weed out unnecessary expenses. Moving to an optimally sized office, renting a smaller warehouse, leasing out excess space, just-in-time inventory management, and cutting overheads are just some of the solutions. Even seemingly insignificant optimizations can have large cumulative effects over time. Some improvements come at an initial cost but repay several times over. For example switching to energy-efficient lighting solutions saves organizations millions in utility bills.
B2B (business-to-business) firms can opt for invoice factoring to speed up their cash inflows. Invoice factoring involves selling invoices to factoring agencies. These agencies purchase (or ‘factor’) the invoices at minimal cost. For instance, consider a business which is waiting for a client to pay up on an invoice worth $500. The payment term (credit period) is 60 days. Instead of waiting this long the business can simply sell the outstanding invoice to a factoring agency for, say, $350. This way the business can have instant cash inflow. When the client finally pays, they do so directly to the factoring agent. Invoice factoring involves a trade-off between getting paid the full amount and getting paid quickly.
Pricing is the keystone of every marketing strategy. Getting the pricing right is often a tough nut to crack. If you’re struggling with liquidity, consider revaluating the pricing to improve sales. Pricing involves several components. Some of these include the competitors’ price, margins/premiums, volumes, production costs, and so on. It may be possible to increase prices without damping sales, or to reduce prices without reducing profitability. Customer feedback should be a central component of a pricing strategy. The most effective pricing decisions are made with the help of statistical models.
What is Business Cash Flow?
Business cash flow is the movement of money in and out of a business. It shows if a business is getting more money than it’s spending (good) or less (not so good).
How to Calculate Cash Flow in a Business?
You find cash flow by subtracting money going out from money coming in. Money coming in is like sales and loans, and money going out is stuff like expenses and loan payments.
- Example of Cash Flow in a Business:
- Imagine a small store sold $100,000 worth of stuff and had $80,000 in expenses.
- They also got a $20,000 loan. So, their cash flow is $40,000 (money in minus money out).
- Good Cash Flow for a Business:
- Having more money coming in than going out is good.
- But how much is good can be different for every business.
Is Cash Flow the Owner’s Salary?
No, cash flow is not the same as the owner’s pay. Owner’s pay is just one thing a business spends money on.
Is Cash Flow the Same as Profit?
No, cash flow and profit are different. Profit is about how much money is left after you take away all the expenses, even some you don’t pay cash for.
Do You Pay Taxes on Cash Flow?
You don’t pay taxes on cash flow itself. Taxes are paid on the profit a business makes, but how you manage cash flow can affect how much tax you owe.
About the author:
Hemant G is a contributing writer at Sparkwebs LLC, a Digital and Content Marketing Agency. When he’s not writing, he loves to travel, scuba dive, and watch documentaries.