Complete Guide on How to Manage Cash Flow for Your Business
When it comes to managing your business financially, the term cash flow will surface as an essential matter.
14:57 02 March 2020
Whatever is the current status of your business, it is important to manage cash flow as it is crucial to the survival of your business. Some businesses use up a lot of working capital, which can cause a delay in buying materials, paying suppliers and even paying salaries. The delay between the time you have to pay your suppliers and the time you receive money from your customers can pose a problem, but the solution to this is cash flow management.
What is Cash Flow?
The key to understanding any concept is to know the basics about the concept. In the business world,cash flow is essentially the movement of funds in and out of your business. It is important that cash flow is tracked, and you can choose to do so either weekly, monthly or quarterly depending on your business operation. Basically, there are two types of cash flow:
- Positive cash flow – is the status wherein cash coming into your business from sales, accounts receivable, etc. is more than the amount of cash going out monthly expenses, accounts payable, salaries, etc.
- Negative cash flow – is the status wherein the outflow of cash is greater than the cash coming in. This can generally have adverse effects on the business, but there are steps that can be taken to remedy this situation.
How Can Cash Flow Be Improved?
Basically, you have to differentiate cash flow from profit. Although they are related, cash flow can be considered as the heart keeps pumping blood to keep your business alive. It’s a more detailed way of knowing what happened to your cash, and not just simply the calculation of revenue minus expenses, which is profit. Essentially a positive cash is needed to generate profit. Before you can actually make a sale of your products and generate profit, you need to have enough cash to pay your suppliers and employees so that you can make your products.
Know that business growth doesn’t always equate improved cash flow. A bigger business means more supplies, expenses and more employees to pay. Thus, planning for growth and its corresponding cash expenditures is essential if you want to make business growth a solution to your cash-flow problem. There are other cash flow improvement steps can be followed below.
Improve Collection of Receivables
Use a lockbox service, which are post office boxes serviced by banks for customers in far and remote locations to mail their payments and for a faster processing by banks. You can also ask customers to pre-authorize checks so that banks can draw against their accounts at specific intervals. Offer cheap fund transfer options for your customers, such as depository transfer checks.
Strictly Separate Business and Personal Finances
One of the most common errors business owners make is mixing business and personal finances. This practice uncertain and inaccurate business cash flow performance tracking and forecast. Instead, keep the two separate. This can effectively let you know how much cash your business is actually generating. This way, you can have a good position of paying yourself and use the excess cash to further strengthen or expand your business.
Build a Cash Reserve
Cash is king in the world of business, so a ready access to it can determine the success of your business. Thus, to effectively manage and protect your cash flow, you need to build a cash reserve. A cash reserve can provide an effective fallback mechanism to manage unexpected events. While it is desirable to build a large cash reserve, you also have to consider your current business situation. Having a modest cash reserve can still give the confidence to run your business and finance simple improvements. You can gradually increase your cash reserve to protect your business from adverse economic conditions and banking policy changes. Most importantly, your cash reserve is a good financial option you can readily avail for business growth opportunities.
Keep Your Books Updated and Accurate
A good tracking method can help keep your cash flow well monitored and controlled. In the world of accounting, your cash flow is only as good as your accounting and reporting. Make sure to update your accounting information regularly. This way, you can see the financial status of your business clearly and make accurate financial decisions.
Cash flow can be considered as a critical component for the success of a business. Thus, managing effectively can keep your cash influx consistent and steady. This in turn generates profit. Having an effective monitoring system and taking the necessary steps to keep your cash flow on the positive side are the key ideas to keep in mind to keep your business flexible and secure.