What are the basic principles of cash management?
Cash management plays an essential role in business by the process of monitoring, analyzing, and optimizing the net amount of cash expenses and deducting the cash expenses. It is a necessary measure for the financial health of any business. The recent study conducted shows poor management of cash flow as a critical aspect of business failure. So if your company also spends more than it earns, then this article will help you in learning about cash flow problems.
The small business gets mistaken by avoiding the problems of widespread cash shortages, which is caused by significant gaps between inflow and outflows of the cash. So if you are not able to pay your bills for an extended period, it’s next to impossible to stay in business.
An excellent example of this could be a real estate business where the developers always face the problem of cash flow due to the requirement of significant capital investment and ongoing cash outflows. Unless some of the developments are sold before construction, the situations go like this, especially of the property market softens. This is the main reason for property developers being bankrupt due to the rapid expansion and need for higher labor costs, equipment’s and so on. Extending credit to other businesses may also lead to cash flow problems. Unusual delay of the payment from customers and invoicing can lead to a negative cash balance of the year.
How to Improve Cash Flow
As the owner of your buisness, you need to perform the cash flow analysis and forecasting regularly. Nowadays, there are many software accounting built-in programs available to make the analysis process simpler for you. You need to develop strategies to maintain adequate cash flow for your business. This could be done by shortening the cash flow conversion period so that the business brings the money faster.
If the cash, which is generated by sales, accounts, and receivables of the business, is more than money leaving your business, which includes account payable, monthly expenses, salaries, etc. It is calculated under positive cash flow. Whereas if the outflow is more significant than incoming cash, it is a sign of trouble, and you need to take remedies to cut down the expenses.
You can speed up this process with the help of banks for the ones from far-flung locations. Your customers can pre-authorize the check, which can be quickly processed by the bank and offer them discounts on paying it promptly. Make sure you centralize one bank and ask your customers to pay with depository transfer checks for cheap fund transfers.
Tightening credit requirements
The growing business always need to extend credit for their customers. But you need to be sure about their payment of bills being on time or the customer’s aren’t dealing with any cash flow problems. You can ask them to fill out a credit application and check references or else go for credit cards. This may add on little extra expense to your budget , but your payments would be safe and timely.
Increase in sales
If there is more need of cash , then try putting your mind on different ways to attract your customers for selling extra goods. For a growing business, it?s essential to have new customers, though it may take a little time and effort. To do so, you need to analyze the needs of the customer, and this will help you increase your profit by generating more cash.
- Use a cash flow worksheet- Cash flow worksheet helps in keeping a tab on your general cash flow management to track your outflow and inflows. Make sure you fill it up regularly to soften the process.
- ?Extend payables as long as possible- Extending payables can help you crack the best deals while providing higher cash balance by increasing your debt. Many suppliers charge a late fee to make sure the payments are on time.
- Boost sales with creative incentives- Thinking out of the box with some fun ideas can be helpful. You can sponsor a contest or host an appreciation event for the customers, offer incentives, or provide publicity tour to the employees. This will help to boost your reputation, ultimately resulting in new customers.
- Designate a cash flow monitor- Assigning a task of monitoring the cash flow to a person knowledgeable in account and company finances can help you handle this task. They should inform you when you reach a certain threshold by being trustworthy and reliable.
- ?Technological advantage-?The use of cash flow spreadsheets in the cloud?allows the accessibility from anywhere. Also, use professional accounting software by ensuring security as the utmost priority.
- Loans-?If your business is in expanding or growth phase, you can take credit for completing the requirement of more cash. This is also known as debt financing from investors. Cash flow is the movement of funds from in and out of your business, which should be tracked weekly or monthly. There are two types of cash flows.
Problems occurs due to failing to manage the cash flow
Failing to manage your cash flows can lead up to such problems as mentioned below.
Too much stock-
If you start receiving high demand for a particular product, it?s obvious you need to keep the stock high. But if the demands change, you would be left with too much stock and debt of ordering the materials. It might also cause difficult to sell these products.
Long payment terms-
Lengthy payment terms leave you with no cash, and you cannot proceed with the urgent requirements due to the shortage.
Spending money before having it might not be a good idea. You may start ordering new, expand your employees or see another location to grow the business things after getting new customers, but remember the situation can twist as they still haven?t paid you. Even if they pay you, it can lead to short term pressure on your finances.
Why use the Cash flow statement
The cash flow statement is a profit and loss stamen and balance sheet to give data of cash moving in and out of business as well as providing the summary for the available money. It gives details about how growth is taking place and whether it is increasing through debt or income. You can make changes accordingly for your future cash flows by taking out this critical information. You can also ensure from these statements about your needs for alternative sources of finance or the peak season of the business.