“Revenue is vanity, profit is sanity, but cash is king”
It is often said that cash is king for the financial management of any business, and effective management of cash flow is instrumental for the success of any business.
A significant reason for undergoing a cash crunch could be the mismanagement of working capital and the delay or gap between payables and receivables. Solving this issue is the key to managing cash flow and achieving business growth.
Often businesses that experience a gap between their payables and receivables find it difficult to stay afloat. Without seamless cash flow, any business, big or small, won’t have the required agility to respond to the continuously evolving business landscape.
Hence, having a seamless cash flow is considered crucial in surviving sudden economic crunch and continue operations smoothly. In other words, cash flow management means delaying payments as long as possible while ensuring that you receive the payment soon.
Here are some tips which will assist you in managing your cash flow:
1. Be Prepared For Any Kind Of Business Risk
Running a business is not easy and challenges are bound to arise. As such, it is better to be shrewd and anticipate certain scenarios like a sudden need of raw material for fulfilling a bulk order, cancellation of an order which you have been relying on, or risks like bad debts. Analysing such kinds of risk can help you formulate a robust cash flow budget.
For instance, a simple process like reflecting hypothetical situations which possess risk while using a spreadsheet to make cash flow entries by deleting or adding inflows can give you a picture of when that kind of risk might occur. This way, the sheet will reflect the repercussions that can follow in the coming weeks or months, enabling you to be ready with a solution for such upcoming situations.
2. Separate Bank Account For Your Business
A common mistake that businesses, especially startups, make is not separating their bank account and credit cards. Since early financing usually comes from the owner’s personal account, it comes around as a common mistake.
It is prudent to have a separate bank account and credit card for your business. Additionally, having dedicated accounts will also provide you with separate statements, allowing you to keep a better check on the expenses. Keeping a tab of these expenses can turn out to be beneficial while creating your cash flow budget for the next year.
3. Efficient Inventory Management
Start paying attention to all the items in your inventory by regularly checking and analysing them on the basis of their selling frequency. Remember not to keep any such item in your inventory which is lying idle and is using the company’s working capital. It is important to note that a lean inventory model is important to ensure the efficient and productive use of working capital.
4. Increase Your Cash
Most banks provide interest-earning accounts for keeping your cash. There might be some banks that require a minimum balance for such accounts. But, since the interest rates on these accounts are usually lower than a savings account, money market accounts, or certificate of deposits (CD), it is advisable to keep most of your funds in accounts that pay higher interest.
Don’t park money in long term certificates of deposit, as the lock-in period is high and redeeming early can result in penal charges. While investing in CDs, it is advisable to opt for penalty-free certificates, as they provide the liberty to withdraw anytime.
5. Focus More On Cash Flow Than Profits
According to Agnes Cserhati of AC Power coaching, 90% of the SMEs that she has worked with do not plan their cash flow from day one, in spite of keeping profit margins for the years to come. She believes this is one of the major reasons for businesses to fail.
“If your cash flow is in order, your profit will be in order,” she says. “A lot of businesses do not make it past six months. They might have been a profitable business eventually, but they need to have a good cash flow to survive.
It is better to begin working with clients who are reliable and are quick in their payments, even if the client is not very big. This gives your business a foundation to build upon. Once the cash flow is strategised properly you can start dealing with bigger clients based on the feasibility.
6. Incorporate Modern Technology To Help You Business
There is a reason why web-collaboration tools like Slack have a valuation of $2.8 billion. This particular application can provide your business with tons of utility by enabling all employees to stay connected with each other, resulting in an increased output by the business.
There are many businesses which are skeptical about these apps, and consider them as an unnecessary expense. However, facts suggest that a business usually benefits if it incorporates technology to boost productivity and output.
Parting Thoughts
Most businesses will learn in their nascent stage itself that “Cash is king.” Hence, keeping and managing healthy and steady cash flow is essential for a business to run smoothly. Apart from this, managing cash flow will also help the business in times of unforeseen risks and assist in raising funds and getting investments. Building and maintaining a sufficient amount of cash can present various opportunities for a business to grow without any hindrance.
