Cash is an essential component for every business. It does not matter how much revenue your company generates, but if that money remains trapped in payables and idle inventory, then that money will be of no use. Why do we need cash flows? We need cash flows for our business for excellent circulation of money. Excellent cash flows aid your business in meeting the financial objectives and creating new growth opportunities. If your company learns to manage adequate cash flows, then you will have enough cash in your account to pay out your bills, initiate a new business project, and kickstart a new marketing campaign. Let’s learn six ways to manage your business cash flows.
What is cash flow?
Cash flow is a process that tracks the inflow and outflow of money through your business. For maintaining cash flows, we have to take the aid of cash flow statements. Positive cash flow explains that your business is generating more revenue through sales and funds, while the outflow in expenses and bills is lesser.
Though as easy as it may sound, maintaining adequate cash flows for your business is not a piece of cake. Even the most successful entrepreneurs struggle when it comes to preserving cash flows. According to the Federal Reserve Banks, companies may take cash flow loans to maintain their statements. But it is not a permanent or long-term solution.
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In the following section, we are going to explore six effective ways which you can use to manage business cash flows:
1. Make efforts to learn your business-specific cash flow:
The cash-flow cycle is the period in which you spend money to purchase new raw materials, turning them into your product, marketing that product, selling it, and collecting the revenue. Understanding your business cash flow means, you should be able to answer two obvious questions:
- What changed in your previous month’s cash-flow cycle?
- What are you going to do with your business cash?
To answer these questions, it is crucial that you continuously update your income statement and balance sheet. In this way, you can easily keep track of your profit and loss. In addition, managing these statements help you to adjust any essentials in these statements to manage cash flow. For example, you can make early payments or pay the supplier’s cash a little later.
2. Provoke your customers for timely payments:
On average, a debtor pays two weeks later than the actual date. So instead of waiting for the customers to pay you, hustle to get paid. According to Campbell:
“Companies have to be proactive to get paid.”
Your business can be proactive and make customers pay you by managing an effective system that reminds the customers through emails to pay you. You should send the emails seven or ten days earlier to endorse the customers for payment. Besides, if customers do not pay you due date, it is crucial to follow up through the email again. You can also do it at a more personal level, like a phone call.
3. Quick inventory turnover:
To maximize the cash in your business, it is vital to turn the inventory frequently. For example, if a candy shop owner buys candy worth $100,000 per year. Let’s suppose he makes two wholesome purchases $50,000 in the year. That means he will have to wait until the candy (inventory) sells, which means the owner will have less cash to spend on finances. On the other hand, if the owner will make five purchases of
$15,000, he will have more money to meet his financial requirements.
4. Negotiation with the supply chain members:
Negotiating with customers and vendors helps you to manage your two accounts effectively:
- Accounts payable (Customers)
- Accounts receivable (Vendors)
For example, a customer purchases a handsome amount but agrees on a 30-day payment, so you can negotiate with him to pay sooner. Similarly, when a vendor provides you with raw material supply, converting that raw material into your business product will take quite a time. So you can ask your vendor to wait for the payment after a few weeks of receiving them.
5. Develop a financial beanbag:
One of the most effective ways to stay ahead of your financial obligations is to maintain a steady cushion. This financial cushion/beanbag is your “Savings.”
While it may sound easy, saving is not easy, particularly in a business or a startup where you don’t have enough cash. According to successful entrepreneurs and people in the industry, it is crucial to have almost 3-6 months’ expenses sorted out in advance to grow your business.
In addition, another vital source of cash is a business line of credit. It is not similar to traditional loans. Instead, it provides you a safety net against apparent damages. For example, when you have to make payrolls for your employees while being in a financial crisis, the business line of credit aids you in these times.
However, it is vital to apply for it in a healthy fiscal year, and then you can borrow it in the time of need and pay it back when you have extra cash.
6. Strategic growth attitude:
New businesses and startups may look very adventurous and exciting, but they come up with enormous challenges. For example, you got a big new project! Good right? But it will mean new expenses like hiring new employees, their training, more resource wastage, etc.
Businesses need to grow, but you must be vigilant about your cash flows while taking on any new projects. You have to keep an eagle eye on the period in which you will pay back the debt you took for your recent projects. Keeping in mind, you can invest in new projects.
Always keep looking for this fact:
“How many customers do you have? If your business is in profit, then how long does it take to collect the revenue?”