While an idea is the most important part of any business it is money that makes that idea turn into practicality. Any kind of business idea requires money to buy resources and other things and services required to establish a business. Businesses often need to understand the basics of cash flow that would allow them to maintain their business and gradually gain profit.
What is Cash Flow?
In simple terms, cash flow is the inward and outward movement of cash in a month. Initially, business owners and entrepreneurs might feel that they are investing more than the expenses, but cash flows both ways. Normally, when customers buy products and services the cash flows inward and when businesses make expenses the cash flow is outwards. This is also termed as accounts receivable and accounts payable respectively. Hence, cash flow management is an important part of the business.
Businesses have to ensure that they maintain the cash flow because if a business is earning more than expenses than it is called as positive cash flow. However, if the company is earning less than the expenses than it is called a negative cash flow. It is important that you know how to manage cash flow to balance your business the right way.
Why is it Important?
It is hard to imagine a business without any money and investment. New businesses typically need good reserves of cash that can help them to promote their business and reach out to their customers and expand their business. Negative cash flow often ruins the momentum of a growing business. Cash flow management acts like a fuel to ensure your business is running smoothly and the way you want it and you should know how to manage your cash flow.
Elements of Cash Flow
Managing cash flow is quite complicated especially when you have multiple business activities and transactions happening per day. It is therefore important that you focus on how you can evaluate cash flow properly. Cash flow statement is one of the primary tools that businesses can use to create best cash flow management strategies.
- Operating Activities: Among the important parts of cash flow statement is cash received and utilized for normal business activities and operations. In this section of the cash flow management statement, you see the income and expenses of your company. When you sell products and services it should be mentioned in the operating activities section.
- Investment Activities: Businesses need to invest regularly to generate better profit. Hence, everything that the company purchases like properties, equipment, and plants get mentioned in the investment activities section.
- Financing Activities: Everything related to finance of the company is mentioned in the financing activities section. Purchase of stocks and bonds and even business administration loan should be mentioned in this segment.
Tips to Improve Cash Flow
- Know Your Breakeven Point: Even before you think of profit, you need to think of a breakeven point where the total money you have earned is equal to the total amount invested. This is one of the best cash flow management techniques that most entrepreneurs keep in mind. Once you have clarity over your business breakeven point you can focus on managing cash flow and gradually make a profit as well.
- Focus on Managing Cash Flow: Impatience and continuous focus on profit can divert your attention from managing cash flow. Hence, you need to ensure that you manage your cash flow and boost your profit margin gradually rather than trying to make a profit instantly. You should anticipate future needs and at the same time have clarity on when the payment is overdue for cash flow management.
- Build Connections with the Lenders: Banks and financial assistance companies often lend money to businesses. Hence, it is important that you let the banks and other companies know that you might need cash for certain business activities. This is one of the best tips to manage cash flow positively. Build trust and keep them in the loop when it comes to any business investments or expenditures you’re going to make.
- Work with Your Customers: It is vital that your customers pay you immediately after you have provided them with the products and services. Invoice your customers and request them to make the payment at the earliest. Send a follow-up letter asking for the pending payment. When you invoice late you will receive cash late and that will affect the cash flow. You should also make the payment process convenient for the customers to speed up the process. Working with your customers can be a bit difficult but it is one of the best cash flow management strategies.
- Improve Cash Inflow: One of the best tips to manage cash flow is to ensure that you ask for a security deposit for products and services that are large and complex in nature. You should also ensure that your customers have multiple ways to make payment with ease. Encourage your customers to pay on time and avail some great discounts for a limited period of time. You can also come up with a better subscription model to allow customers make their payment on time.
- Minimize Cash Outflow: Reducing your expenses to decrease cash outflows is also one of the recommended tips to manage cash flow. When buying equipment and machines focus on buying maintenance programs that can reduce your repair and maintenance cost. Look out for open source software that is available freely online. Buy good quality equipment and tools that would reduce your repair and maintenance cost.
- Save Some Cash: Business is all about managing unpredictability. Hence, you have to ensure that you always have some cash reserves in your bank that can help you rescue from stressful situations and provide you with the confidence in managing cash flow.
How FinForce helps you manage cash flow?
The trick to surviving hard business situations is to ensure that your cash flow management is positive.
At FinForce we make use of the best technologies and trained professionals that would allow you to manage your business cash flow.
We focus on understanding your business needs to prepare a cash flow report that would help you to manage your business efficiently and achieve business goals.
Contact us now to know more about the cash flow accounting services that can help you succeed in a competitive business environment.