Any kind of business requires a lot of attention to make it successful and more than it requires a good amount of funds to manage the business.
How can a business maintain a healthy capital with them to ensure the business is running smoothly? It is done through cash flow management.
What is Cash Flow?
Cash flow refers to the movement of cash in daily business operations. It’s simply tracking and managing the money in and money out from the businesses.
It is the management of working capital that is required to run the business operations.
Firstly, we need to understand two concepts:-
- Cash inflow-Cash that comes into your business. (Cash Generation)
Example:- sales, investments
- Cash outflow:- Cash that goes out of your business. (Money spent)
Example:- rent, loan
- Positive Cashflow – More money remains in the business.
- Negative Cashflow – More money gets spent than earned.
- Break-even Cashflow – Revenue and Expenses of the business are equal.
From the above description, we can understand that positive cash flow is vital to running a business efficiently and effectively.
How can businesses maintain cash in such a way that they have sufficient money with them?
Business gets hindered when the cash maintenance is not ran properly.
Several methods will help businesses to maintain a positive cash flow.
1) Inventory Management
Inventory management is the most crucial thing for positive cash flow in the business.
Businesses need to check if there are enough raw materials available for the company.
Less inventory as well, stocking up the inventory not as per the requirement can put the business in a crisis.
Demand and Customer availability for the products need to be checked thoroughly.
One of the better ways for inventory management is to know if there is a trend with past data and future predictions, the company will perform better.
A lead time(time between the order gets placed until it is received) will also prove beneficial for the businesses.
2) Know your expenses
When you review your business in the minute ways possible, you will find all the unnecessary expenses you have been making in the business.
If you just check the numbers of sales and profits, it’s not the best use of your business.
It may not lead to the decent earnings you can get through the business, and it can affect the cash flow of the business.
3) Non-Performing Asset can be a risk
A month ago, I saw our oldest retail store closing down its business and I happened to be there and the owner of the business told me how much loss it’s making.
He said it should have got closed a long time ago.
I was emotionally attached to that store as I have seen it since I was a kid but does my emotional attachment give me the right to make the businesses suffer losses?
Often businesses fail to ask this question to themselves and continue to suffer hefty failures in the business and statements gets highlighted with negative cashflow.
An asset that is not performing and consistently making a loss should be liquidated to save the other sectors or branches of the business.
Once the losses gets ceased due to the liquidation of NPAs the company might reach to recovery stage of losses and hopefully make profits with their practical strategies.
4) Receive early payments
This is an era of discounts and offers, and this has helped many businesses to be at the top level.
Offer your customer a healthy discount and request them to pay you early, make good payment options ready for legal and business reasons and discounts will encourage the customers to pay the payments early.
This benefits the buyer, as well as the seller and the trust, is maintained between both parties and a good cash flow remains in the business.
5) Pay later
Again, I am telling you to use discounts or some offers to make your vendor let you pay the amount later without damaging your business relationship with the dealers.
You will have an effective credit period to utilize the cash and make it more than you have discounted to the dealer.
6) Credit Card Utilization
There are endless payments a businessman has to pay, and it can be challenging to manage the cash flow in the business.
If they can make the payments through credit cards, it will allow them to have that grace period.
They can use the cash in other important activities of the business. It also provides reward points and offers to the cardholder.
A business person is someone who is offering discounts constantly, and they don’t get any offers that often.
With the proper use of credit cards, they can save decent money in secondary payments made.
A credit card will also track the expenses and if required it can be used for legal purposes if someone’s to tries to default the transaction.
7) Plan your taxes
Tax planning is an essential aspect of the company.
Tax planning will save money and give you the title of a responsible businessman. Paying timely taxes will also help you to focus on business properly.
8) Identify the risks
Business is a risk, and business is filled with several risks. If not monitored properly can lead to major losses for the business.
Risks like COVID-19 have proved a major threat at a global level.
It’s not possible to predict this kind of risk, but small or known risks should be monitored from time to time and managed for better cash flow.
9) Financial Discipline
Not only on personal finance, but financial discipline requires business place too.
Businesses run out of cash in no time, and it happens mainly due to ignorance.
Financial discipline enables a business person to maintain the positive cash flow in the business.
To achieve success in business, a lot of time has to be given, and capital requirement is a must for businesses to get started.
We have heard people talking about profit and loss statements and balance sheets, but a cash flow statement is essential too.
You need to know the inflow and outflow of the cash. Once you understand the balance of both, it will be easier to maintain.
A wealth created and managed will attract customers and investors to the business.
If your business is strong fundamentally and positive cash management prevails, it will generate higher profits.
Cash flow is a picture of the business, It boosts the growth of business and helps the business to shine.