It is a wise decision to improve cash flow for any business. It makes no difference how good your business model is or how profitable the organization is. It is always recommended to manage your cash flow. No matter how many investors you have to help your business grow, cash flow management is the area to concentrate on if you want to impact your business significantly.
New and evolving organizations frequently lack a cash buffer to cover inadequacies because they constantly reinvest. The years with the exponential growth are also the most difficult when it comes to cash flow. Every business must have proper cash flow management skills for long-term financial success. One of the most difficult challenges for business owners is managing cash flow. Firstly, we should know what cash flow is to learn about cash flow management. This article will also teach cash flow management tips to grow your business.
What is Cash Flow?
Cash flow is the net sum of cash and cash equivalents transferred into and out of a company. Inflows are represented by cash received, while total expenditures represent outflows. The ability of a company to yield positive cash flows determines its profitability and growth for stockholders.
Profitability is not the same as cash flow. Even if a company is profitable, it may not manage to pay its bills. Similarly, just because a company meets all its financial commitments does not imply that it is profitable. A business calculates cash flow by noting how much funds are available at the start and end of a period.
What are the types of Cash Flow?
The cash flow report categorizes cash sources and uses into three distinct categories:
1- Operations Cash Flows (CFO)
Cash flow from operations (CFO), also known as operating cash flow, refers to cash flows directly engaged in the manufacturing and selling of products from ordinary operations.
2- Investment Cash Flows (CFI)
Cash flow from investing (CFI), also known as investing cash flow, reports the amount of cash earned or spent in a given period from various investment-related activities. Investments include the acquisition of speculative assets, the purchase of securities, and the outflowing of investments, including the sale of securities or assets.
3- Cash flow from financing activities (CFF)
The cash flow from financing activities (CFF) part of a business’s cash flow statement represents the net amount of money used to fund the business. Financing activities include loans, equity, and dividend transactions.
What is Cash Flow Management?
Cash flow management is the method of monitoring the money coming in and going out of your business. This allows you to forecast how much cash will be at your disposal for the company’s use in the future. It also assists you in determining how much money your company requires to cover dues, such as employees’ salaries and payments to suppliers.
Many new businesses make the mistake of focusing solely on sales. The primary issue is that many companies do not receive payment immediately after a sale. You could bill a customer for the task and not be paid for months. Meanwhile, your bills, suppliers, and employees’ salaries are due. You could quickly run into a cash flow problem if you don’t account for this problem. Cash Flow management is necessary in such cases.
Cash Flow Management Tips to Grow Your Business
Smart small-business owners prioritize managing cash flow in their operations. They also prioritize reviewing cash flow statements monthly or even weekly to manage their accounting and financial matters of the business in a better manner. You risk bankruptcy if you are not properly managing your business’s cash flow as a business owner. According to a financial study, poor cash flow management accounts for 82 percent of failed businesses.
So, is it simple enough to bring in more revenue than your company spends? Although it may appear straightforward, a positive cash flow involves much more than profit growth. Even if your business is financially beneficial, it is still vulnerable to negative cash flow. If you are looking to improve the cash flow of your business, the following are the cash flow management tips to grow your business:
1- Maintain regular Cash Flow Monitoring
The company owner and the entire company must evaluate cash flow regularly to succeed in a competitive business environment. If your company’s cash flow is poor, you’ll need to pivot to improve your business financing.
Maintaining a positive cash flow can be difficult, but it is essential. Estimate your company’s financing needs and perform a regular cash flow evaluation. It is done by tracking the amount of money coming in and going out. It is also beneficial to have the appropriate business financial tools such as ZohoBooks to monitor the cash flow.
2- Cut Expenses
Controlling your expenses is essential for cash flow management because it allows you to avoid unnecessary operations and maintenance costs for your business. Even if your sales are massive, you cannot allow your operating expenses to run out of control. Otherwise, you may encounter cash flow issues if a market crisis arises or expenditures increase exponentially.
Pay attention to repeating monthly, quarterly, or annual expenses. Can you reduce your spending on amenities, rent, or salary? Are you paying for subscriptions, services, or insurance you no longer require? Are you able to renegotiate the terms of any new debt or rents? This cash flow management tip will prove very helpful in growing your business.
3- Lease equipment to Save Capital
To remain functional, all businesses depend on equipment and capital assets. However, for some companies, leasing or renting equipment is more cost-effective than making a significant investment in buying equipment. Aside from the initial purchase price, machinery and equipment generally necessitate repairing and maintenance costs.
Investing a large amount of budget in costly equipment may not be beneficial to your business right now. Instead, leasing the equipment allows the company to be more flexible. This cash flow management tip will help your business in saving money.
4- Pay Bills using proper Strategies
Spread your payments and extend the payment period as much as possible. Don’t pay all of your company bills at once. If you cannot pay, this can deplete your funds and ruin your relationships with suppliers. Instead, go through your accounts, and organize them by preference. Spread payment dates so that the most important bills, such as rent and payroll, are paid first. We can make less significant and more flexible payments later. This cash flow management tip will prevent negative cash flow.
5- Negotiate payment terms with your vendors
Using low-cost suppliers may appear to be the best option to boost cash flow. Still, flexible payment opportunities may be more significant than low-cost pricing. Ask your vendors about their payment conditions. It might prove helpful to time your payments to coincide with your cash inflows. It is necessary that you don’t compromise the quality while saving money.
6- Quickly Collect Receivables.
Encourage prompt payment of receivables to improve your cash flow. These cash flow management tips can help you acquire receivables more quickly:
- Request some advance amount from your clients while taking order
- Clients who pay in advance should be given a discount
- Take into account using online invoices and offering online payment methods
7- Good Business Relationships
One of the most important responsibilities for any company is developing good customer and supplier relationships. You can reduce negative cash flow and help achieve consistent sales by developing and maintaining positive interactions. Customer relationship management is ultimately defined by regular communication and bringing results.
Customer relationship management is ultimately defined by regular communication and bringing results. A good relationship with customers will ensure timely payments. In contrast, a good relationship with suppliers will help obtain payables discounts. These cash flow management tips will help your business maintain positive cash flow.
8- Use of a Business Credit Card
Consider using a business credit card for regular business payments to save money. Business cards will increase monitoring and accessibility to your expenditures. This will benefit in better understanding of whether you have enough revenue, where you are spending cash, where your revenue is coming from, and where you could use it most effectively. Take advantage of any bonus programs that can help you save money, such as a certain proportion of cash back on certain purchases through your business card. This cash flow management tip will help you save money.
Benefits of Good Cash Flow Management
Cash flow management is one of the essential perimeters of running a business. Positive cash flow can ensure success in any industry. Excessive debt and even bankruptcy can result from poor cash management or a negative cash flow. The latest wave of corporate bankruptcies caused by the pandemic has demonstrated the importance of businesses maintaining adequate capital reserves. The following benefits represent the benefits of good cash flow management for the growth of your business:
- It helps to maintain a good relationship with customers and suppliers.
- It gives you more negotiating power while dealing with customers and suppliers as you are in a better financial position.
- It helps to acquire loans when you have positive cash flow.
- It helps you to seize a good investment opportunity without worrying about cash flow.
- It enables businesses to navigate through rough financial times.
- It helps you to make better plans and sound decisions to grow your business.
Why Choose Lynchpin for Cash Flow Management?
Lynchpin Consulting professionals focus on understanding our client’s needs and developing a plan for cash flow management. That will assist our clients in better completing their business financial matters. Our efficient cash flow management services in Dubai clearly show your company’s financial potential.
Our financial experts will evaluate your cash inflow and outflow to predict your company’s financial standing during a specific period. This detailed evaluation can forecast your company’s financial growth and sustainability so that you can strategize ahead of time.