Cash is also known as the blood of a business; a business survives as long as the cash circulates all over. Therefore, cash flow management is something you need to be careful about.
Whenever you use up all of your working capital, a significant gap forms between paying your suppliers and receiving revenue from your clients, the only way to avoid situations like this is to manage your cash.
Thus, it is critical to keep up with a certain working capital level to avoid imbalance and smoothly operate your business. Cash flow management delays expenses as much as possible and encourages clients to pay as soon as possible; this is how the balance is restored.
This article will present ten cash flow projection and tips to manage and grow your business, but first, let us discuss its basics.
WHAT ARE THE SIGNIFICANCE OF CASH FLOW BASICS?
Cash flow management for small business is nothing but the movement of your business’s finances in and out. A company usually tracks their finances weekly, monthly or quarterly. There are two types of cash flows:
Positive Cash Flow: a cash flow becomes positive when the cash coming into your business via sales, accounts receivables, etc., is more than the cash going out via accounts payable, monthly expenses, payrolls etc.
Negative Cash Flow: a cash flow becomes negative when the cash is going out of your business via accounts payable, payrolls, expenses etc., is greater than the cash entering your business via sales, accounts receivables, etc.
OTHER BASICS OF CASH FLOW
Profit doesn’t always mean a good cash flow: receiving profit is a positive thing but not necessarily a positive cash flow. Your cash takes account of your revenues and expenses; if your expenses exceed your revenues, you can not call it a positive cash flow.
Recognize your breaking point: you must understand when your business is going to make good profits, and set a goal to strive for and set up a target for your future cash flow.
You can not be in control if you are unaware of the financial data: ask yourself the following questions before calculating the working capital your business needs:
- How much inventory should I keep?
- How many invoices are overdue?
- How much cash is invested in the operations?
- How big of a gap is between paying your suppliers and receiving payments from your clients?
Your accountants, bookkeepers and other cash flow management tools such as your accounting software or even spreadsheets can give you a better insight into your business financial health.
10 TIPS TO MANAGE YOUR CASH FLOW
There are two strategies known to enhance your cash flow statements 1) increase the revenue and reduce the expenses. Some business owners even fall into the vicious circle of using credit cards, which is not a good idea to cover your costs. We are explaining the top 10 ways to manage your cash flow:
Understand the break-even points:
you need to figure out your break-even points before heading towards positive cash flow. You will know you are doing it the right way once you go over the break-even point. However, if you fall short of it, you must be facing an issue.
Set Up Your Invoice Timelines:
It is good to set up crystal clear terms and policies in writing before taking on a client or a supplier. Do not forget to clarify when you expect the payments of the invoices.
In the case of resource-heavy projects, we strongly suggest asking for an advance deposit as a reason to cover up necessary expenditures. Then ask for the rest after reaching certain points.
Encourage early payments:
An IOU (I Owe You) is not enough for your business; you need cash. Encourage your customers to pay as soon as they can. You can also motivate them by offering them certain offers and discounts if they pay ahead of time.
Prioritize cash flow over profit:
Profit doesn’t define positive cash flows; if you earn a good profit but spending too much, on the other hand, the cash flow might go down. Make sure you maintain a balance between your inflow and outflows of your business.
Assign someone to review your cash flow:
It is essential to take care of your cash flow, but it shouldn’t be the only thing that occupies your mind. You can assign someone such as a bookkeeper or an employee you can trust and let them review your cash flow. Make sure you are always updated with the current cash health, and the break-even point is maintained.
Upgrade your technology:
You can store your spreadsheet in the cloud to make it more conveniently accessible, or you can also use affordable accounting services to take care of your cash flow.
Keep Emergency Cash Reserves:
Just like personal emergency funds, your business must also keep an emergency cash reserve. It keeps your business all shield up during an economic crisis. Emergency reserves for upto six months are ideal.
Encourage Sales with incentives or promotions.
Promotion is one of the most effective cash flow management tools. It is a good idea to run a contest, initiate consumer loyalty and referral programs, or boost your reach via social media.
Otherwise, you can also clear out your inventory and start a healthy cash flow. Promote discount sales and planned promos to stimulate the product movements as much as possible.
Check your expenses:
Increasing the inflow of cash apparently depicts good cash flow management. However, cutting down your costs can give similar results.
If you have future payments, try to negotiate and extend the payment date. Few weeks or even a few days can have a significant impact on your cash flow. You can hire part-time staff and fill up the staffing gaps. You can give up your unused equipment on lease. Look for other ways to increase your profit margins, such as cheaper suppliers.
Clear out your inventory
Clearing out your inventory brings in a breath of fresh air into your cash flow. You can heighten up the product movement pace by discount sales and promotions.
WHAT ARE THE CASH FLOW FORMULAS?
There are three cash flow formulas:
Free Cash Flow: Free Cash Flow refers to the revenue generated by a company after accounting for outflows of cash to help business operations and maintain its capital assets. It doesn’t involve interest payments.
Free Cash Flow Formula = Net Income + Depreciation/Amortization – Change in Working Capital – Capital Expenditure.
Operating Cash Flow: Operating cash flow refers to the cash inflow generated by regular business operations. Positive operating cash flow depicts if the organization generates enough revenue to cover its operational costs and grow.
Operating Cash Flow Formula = Operating Income + Depreciation – Taxes + Change in Working Capital.
Cash Flow Forecast: Cash flow forecasting, often known as cash forecasting, is a method of anticipating the movement of cash into and out of your firm over a specific time period. A cash flow forecast indicates your future cash flow based on revenue and spending. It is a useful tool for making decisions regarding finance, capital expenditure, and investments.
Cash Flow Forecast Formula = Beginning Cash Flow + Projected Inflows – Projected Outflows = Ending cash.
Through this article’s medium, we explained ten cash flow management tips to grow your business. We further elaborated on the significance of cash flow basics and diver a little deeper into the topic. The cash flow management tips including: understanding break-even points, setting up invoice Timelines, encouraging early payments, prioritizing cash flow over profit, assigning someone to review your cash, upgrade your technology, keep emergency cash reserves, encourage sales with incentive promotions, check your expenses and clear out your inventories. Lastly, we explained the cash flow formulas, i.e., Free cash flow, Operational cash flow and operating cash flow.