Virtually everyone tends to think cash that the prime challenges of businesses are generating sales, achieving profitability, and also grabbing market share. However, as important as these objectives are, businesses big or small can very easily trip up if they do not manage to control their cash flows because even if a business is profitable on paper, it can result in bankruptcy due to insufficient cash flow.
Understanding the Concept of Cash
There is nothing complicated about the concept of cash flow. Essentially it represents the movement of funds to and also from your business. All businesses generate funds from sales and also taking on debt, while cash outflows occur because they have to incur a large variety of capital and revenue expenses to manufacture the products or deliver services. Cash flows can either be positive or negative.
A positive cash flow, which is what you should be aiming for, is achieved when the cash coming in from sales, outstanding receivables, and debt are more than the expenses. When the opposite happens and the cash reserves of the business get depleted, it is called negative cash flow. Your cash flow will be impacted negatively even if your sales revenues are zooming but your overheads rise faster, according to https://www.inc.com. When this happens consistently, you should be worried because it means that your business will run aground for lack of sufficient cash for operational expenses. However, there are quite a few ways of correcting the situation by which you can generate positive cash flow. Some practical tips from experts for improving cash flow:
Work with Key Suppliers
No business can operate without purchasing supplies and also services from various vendors for manufacturing products or delivering services. However, if you are working without proper planning and also research, you will find yourself invariably paying more than optimal prices. It is important to figure out which inputs are critical for your business, estimate the demand, and work with establishing relationships with a few vendors with whom you can negotiate long-term contracts that offer better prices, terms of credit, discounts for bulk purchase, as well as smart inventory management that saves you from locking up your precious funds in inventory and storage space.
Put All Spending Under the
It is not always necessary that you are buying the goods and also the services that you need. Scrutiny of your expenses will invariably turn up items that were perhaps not necessary. Even if the costs look small, over time, and many items, the total expenses can amount to a significant sum that can be better deployed elsewhere. Certain expenses look trivial, however, overlooking them can cost you thousands of dollars in fees and expenses that are not vital to your business and can have a major impact on your ability to manage the cash flow. Taking a hard look at your expenses can help you to conserve cash and also make your business more profitable.
Efficiency Is the Key to Stable
Cash Flows, According to Financial Experts, Observes Mike Giannulis
When you run your business
efficiently, you end up maximizing your cash flows because you are then
achieving the maximum for your efforts. Efficiency covers everything right from
employee productivity to using smart technology, energy-efficient lights, and
HVAC equipment, office automation software, and even reorganizing the office
layout for better workflow. The pot of gold at the end of the efficiency
rainbow is savings in costs across a very broad spectrum of heads ranging from
wages, overtime, utilities, inventory, receivables, and more.
Bill on Time
It is strange but even when the only way a business generates cash is when it invoices its customers, many businesses tend to fall behind in this vital task. Consequently, customers do not get invoiced and your cash flow suffers. Mike Giannulis observes that financial management experts always recommend investing in good invoicing software that can automate the task and send out the bills on time every billing cycle. Not only will this send out clear signals to your customers but can also help you significantly in stabilizing your cash flow. Offer incentives to customers in the form of discounts for making payments promptly. To make it convenient, you can not only send the bills via email but also accept payments by credit card or online bank transfer. Such an arrangement also saves you the trouble of having to physically bank the checks and make additional accounting entries.
Use Factoring Services to Get Cash
into the System Quickly
If you have decent profit margins
on sales but managing receivables is a problem due to late payments, you can
consider using factoring services from specialist financial intermediaries.
Factoring invoices is essentially selling your unpaid invoices to a financing
company at a discount of around 15-20%. The balance less the financing fees is
paid once the financier collects the payments. While it is not an alternative
to a bank loan, factoring invoices can help to access money when you are facing
a severe cash crunch.
Evaluate Pricing Policies
Often your business may be losing
out to competitors simply because your pricing is not competitive enough. As a
result, you may be failing to manufacture products economically or losing out
to more nimble competitors. It is also possible that you have damaged your cash
flow in your eagerness to undercut your competitors by adopting unsustainable
pricing. However, before you start making price corrections, you need to review
the entire marketing and production environments and carry out intensive
research so that you can accurately project the impact of revenues and margins
due to the price change.
While it is much overlooked amidst the noise on increasing sales revenues, market share, and also profitability, generating a positive and also stable cash flow remains one of the most challenging tasks for a business on a day-to-day basis, even for large businesses. Focusing on the cash flow forces managers to look at not only the quantum of cash flowing into and out of the business but also critically, the timing of such flows. Banks and large investors consider the volume of cash flow as well as its stability as critical factors behind their decisions to extend loans or invest in the business.