For any business to survive, cash flow is the most important financial factor. A Company may have fantastic revenue, reasonable expenses and significant income, but if its financial operations are not managed efficiently, it could still have a negative cash flow. And if a company has a negative cash flow, no matter how promising the business model is eventually, it will go bankrupt. Without cash, profits are meaningless, and most of the businesses fail because of poor cash flow management. For a business to succeed, there should be a proper cash flow management in business. Further, in this blog, we will talk about effective ways of improving cash flow in the business.
What is Cash Flow Management?
Cash Flow Management in a business refers to the process of monitoring the inflow and outflow of funds. The fundamental goal of cash flow is to make sure that the incoming flow of funds in a business is always greater than the outgoing funds. Here it is important to understand that cash flow is not similar to profits. A business may have positive cash flows and still be in loss. There are two kinds of cash flows:
- Positive Cash Flow: This occurs when the incoming flow of funds into your business from sales etc. is more than the outgoing funds of your business through monthly expenses, salaries etc.
- Negative Cash Flow: This occurs when the outflow of cash is more than incoming cash. Negative cash flow generally creates problems for businesses which eventually may lead to bankruptcy.
Importance of Cash Flow Management
Most of the businesses fail due to poor cash flow management. To prevent a business from bankruptcy, it becomes s essential to have proper cash flow management. Following are some of the points which show how a good cash flow management system enhances the overall workflow of the business.
- Credit Worthiness: Companies with a positive cash flow develop a good reputation with banks and financial institutions. Banks and financial institutions[1] prefer extending credit to such borrowers. Companies with impressive credit rating are more likely to raise funds from the open market or seek foreign investment.
- Enables Investment: The theory of cash flow management advocates that inflow of funds should always exceed the outflow to sit on a surplus. The surplus money can be invested to reap benefits out of the investment. Therefore, a company with positive cash flow can indulge in investments to reap returns.
- Enhances the relationship with Vendors and Employees: An efficient cash flow management ensures the timely payment of vendors. To run a successful business, it very important for the business owner to maintain a good relationship with the vendors. If a company has a positive cash flow, it allows the company to be in a position to honour the vendor obligations on time.
Moreover, a positive cash flow also allows businesses to timely disburse the regular expenditure such as salaries. Timely disbursed salaries keep the morale high of the employees and give them a sort of motivation to work efficiently for the company.
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How to Improve Cash Flow Management in Business?
Following are some of the steps that should be followed to improve the Cash Flow Management in Business:
- Open a Separate Bank Account for your Business: A common mistake that startups do is mixing business and personal bank accounts. For initial financing, owners tend to use their personal bank account, which should be strongly avoided. All the related business transactions should be done through a separate business account.
- Keep Track of your Inventory: To maintain good cash flow, an eye should be kept on inventory movement to determine which items are selling and which are just kept in there. Inventory levels should be kept lean so that your working capital isn’t tied up unprofitably.
- Buffer Money: Businesses should always keep at least three months worth of outgoings in the bank account for future emergencies.
- Control Cash Outflows: The best way to control the cash outflows of your business is to use cost-cutting opportunities. If the cash outflow of your business is unmanaged, it may silently end your business.
- Fasten the Recovery of Receivables: Instead of waiting until the end of the month for invoice generation, it is advisable to generate the invoice as soon as the goods or services are delivered. This will guard the businesses against late payments. To fasten the payments, businesses should make the payment methods more feasible for their customers; this can be done by adding payment link to invoice so that customers can pay through their credit or debit card.
- Delay Payables: Unless there is a worthwhile incentive for businesses to pay early, it should be figured out how late you can pay without risking late fees or harming the relationship with vendors. This allows the business owner to keep cash in his account until it’s needed the most.
Take Away
Business owners in their early days of business tend to realise the fact that “Cash is King”. Having an adequate stock of cash provides an ample amount of flexibility to any business. Therefore, it becomes really important for companies to have an effective cash flow management as it shields them from the risk of bankruptcy and also helps them to expand the horizons of their business.
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