Efficient management of cash flow is an integral aspect of any business. Cash flow management is nothing but an analysis of the money spent and the money earned by a business over a certain period of time – typically a year. Once the owner knows which areas of a business need improvement, he or she can take steps to concentrate on those areas and enhance the profitability of the business. However, even though cash flow management may sound a bit complicated, you do not have to be a Harvard graduate to get it right.
Mentioned below are 4 simple steps which you can implement to ensure a positive cash flow:
1) Cash is King: Always aim to have cash at hand. Without cash, it will be impossible for you to pay your debts, rent and the salaries of you employees. If there are severe delays in payments, your employees will quit, you will be unable to raise more finances and ultimately the entire business structure will collapse. It does not matter even if you have made a technical profit – money is useful only when you have it in your position.
If there is a severe delay in the inflow and outflow of cash, it has a deplorable impact on the sustainability of your business. The best way to avoid negative cash flow is to encourage people who owe you to pay at the earliest and delay making payments to suppliers for as long as possible.
2) Always maintain a cash flow statement: A business has many different branches – sales, technical department, administration and so on. A cash flow statement is a clear and concise data chart which facilitates easy interpretation of the amount of money spent vs. money earned. A cash flow statement enables business owners/managers to focus on minimizing expenditure and maximizing income.
Many small business owners fail to maintain cash flow statement and thus it becomes very difficult for them to identify which aspects of their business needs more attention. Their businesses function haphazardly and inevitably suffer losses. Thus, maintaining a cash flow statement is absolutely indispensable for the success of your business. You can use simple software especially designed for cash flow management or you can employ an accountant to do the work for you.
3) Always have a cash buffer: There will be times when there will be a strain on income. Economic depressions, seasons, delays in customer payments and inflation are bound to take their toll on a business. Having a cash buffer helps your business to get through such tough times. However, if you have too much money lying around and not being put to effective us, then this can also hurt your business. Thus, it is essential to have cash buffers but not at the cost of wasting valuable resources.
If you have assets such as old inventory which are not bringing in any cash, then it is advisable to liquidate these assets and divert the funds towards increasing productivity.
4) Offer discounts to customers who make timely payments: This is one of the most widespread and effective methods to encourage customers to pay on time. Also, it is important to perform credit checks on all new non-cash clients. This is a great way to eliminate all future delays in payments. Also, if you have 20 days to make a payment, make full use of that time period – there is no need to make the payment in 5 days when you can utilize the funds for other purposes.
Cash flow management is not rocket science, it just needs you to get your priorities right and requires a bit of prudence, planning and diligence.