Discover the basics of cash flow
Cash flow is considered as the reason why companies succeed or fail, and understanding the basics of cash flow will help you manage your business more successfully.
Cash flows that your customers pay for products or services, and if they run out when you make payments for goods or services, then it is important that you understand this – cash equals profit. Why not?
Question – If I made $ 100,000 this month it would mean I had $ 100,000 in the bank.
Answer – No it does not, without any doubt that some of the sales you made to the customers were on credit, which means they have 30 days to pay you. Therefore, the cash for this sale has not yet been received and is not in your bank account. Similarly, when you buy inventory for your business, it will probably also be on credit, so you have 30 days to pay. Balancing your money now becomes a balance and you have to keep doing this daily, otherwise you may soon find that you run out of cash and now your business may be in financial trouble.
The importance of cash flow forecasts
When a company experiences rapid growth, cash can be tied up more quickly when buying replacement stock, and without extra resources, the company’s cash reserves can fall sharply and put pressure on the company’s financial situation.
Cash flow forecast gives your business the following;
- A detailed forecast of expected revenue, payments and cash balance over a given period.
- A tool for anticipating short-term borrowing needs if there is a cash deficit, as well as investment opportunities if you have a cash surplus.
Managing receivables to improve cash flow;
One of the most important factors in managing your company’s cash is the ability to collect your receivables (debtors) as soon as possible. Here are some ways to do this;
- Streamline the shipping to billing process and get your invoices done quickly.
- Communicate to your customers who find it difficult to pay their account and offer them extensions, pay half now, pay half later arrangements, offer discounts to pay early. Sometimes regular communication with them promotes goodwill between both parties and they are likely to recommend you to others.
- Identify accounts that can potentially be default and contact them immediately to discuss ways you can help them pay their accounts sooner.
- Offer early payment discounts.
- Loan against your debtor’s ledger (also known as debt factoring). This can free up host cash and give you additional reserves.
Management of inventory to improve cash flow
Inventory is sometimes referred to as a necessary evil that affects your cash balance. It is necessary because supply and demand never exactly coincide, and it hurts because it binds cash.
- Reduce inventory – Service companies may not have much inventory other than desktop. Manufacturers, on the other hand, have raw materials, work in progress and finished goods. The key is to maintain an adequate inventory but not an excessive one.
- Monitor Inventory – Don’t leave your stock inactive. Consider automatic inventory management software to increase inventory turnover. Storing idle on your shelf costs money.
Managing paid accounts to improve cash flow
Cash flow and paid accounts are very closely linked. A purchase made on credit means you have a certain amount of time to pay for it, while not physically handing over any money right now, you will within 30 days, so you have to make sure you have the money available to pay at that time.
- Supplier Negotiation – Sometimes you may need to contact your suppliers and negotiate when you can pay your account. Remember, it is in their best interest to help you because if they do, they will likely receive their money no matter how long it takes, a victory for them and a victory for you. If they make life difficult for you and in turn put your business under financial strain, they face the risk of never seeing any money from you again if your business fails, therefore you lose them and lose you.
So simply understanding the basics of cash flow will give you critical cash flow tips when managing your business cash flow. Of course, if you want to know more about managing your business cash flow, visit Cash flow secrets revealed