Why Maintaining a Great Cash Flow is Important for your Business?
The Art Of Recording The Vitamin C – ash
There is more to see than what is put out. While many companies seem like they’re doing well, this might not be the reality. It has been the case with many firms that taking a look at their books shows them the dire situation of their company and how desperately they need to manage their cash flow. While the reputation of a company might not reflect this truth, reputation is not the only thing investors look at.
People don’t want your promises alone, especially investors who want to see results rather than hear your words. Along with sales, profits, and other means, one of the most influential ways to explain the regulation and efficiency of your business is with the help of a solid, stable cash flow.
What Is Cash Flow?
The cash flow of your business is an indicator of its health. Cash flow is generally defined as the inflow and outflow of money that takes place in any firm or organization. It simply is the inflow of money that you make from your business and the outflow of money that you have to pay in the form of various expenses. If you make more money than you have to pay, then you have a positive cash flow. Similarly, if you have to pay more money than you make, you have a negative cash flow.
A cash flow is a strong point and essential aspect with regard to your business. It’s the whole idea of your companies’ consistency through the accounts, credit, statements and so. It is a necessary component to understand and maintain steadily in order to regulate a potential and strong business. The cash flow of your business venture can very well be the deciding factor between whether your company is going to thrive in the coming future or you have to finance your working capital through debt.
Why Do You Need To Maintain A Good Cash Flow?
Even if you are making great profits in your business, it doesn’t ensure a healthy and positive cash flow that can support the growth of your business. Even a profitable business can face bankruptcy.
If you want to keep your business afloat, you need to keep track of your cash flow. You might have a lot of customers, but that doesn’t mean you can cover all your expenses. Consider a situation where a business might have received orders for Rs. 10 Lakhs, and have ordered all the materials to create their product for a total of Rs. 7 Lakhs. In addition to this, they have many expenses like rent, insurance interest payments etc. which add up to Rs.5 Lakhs. In such a situation, even if the business asks for more time from the creditor to pay their money back, they might not stay open for a very long time.
Not only is a great cash flow important to keep your business open, but it is also important for its growth. A strong cash flow gives you the opportunity to re-invest your money in order to expand and grow your business. Having a positive cash floww allows you to invest money in research and development, or to build new infrastructure for your business, or to expand your are of expertise. The opportunities for growth go on increasing as you the health of your cash flow improves. The possibilities are simply endless.
How To Maintain A Good Cash Flow?
So surely, you need to understand how to maintain a good cash flow and when there are so many ways and techniques out there, here are a few major and effective ideas to consider:
When to Pay and Get Payed?
While paying your vendors, it is better to push that payment as much as you can and take the maximum time to pay your vendors or suppliers. This strategy leads to an interest-free line of credit and also allows you to keep your working capital in use for as long as possible.
Another way to maintain a steady cash flow is to take advance payments. This will allow you to put that capital to use sooner and also help you avoid taking debt to use future cash flows. Set your terms of payment clearly to your customers before hand and closely track and collect all overdue accounts.
EMIs – The Smart Choice
When it comes to using supplies and equipment you want the best. But all good things come at a great price and many times it exceeds the monetary potential of the company. A high risk many take assuming the sales will exceed expenditure.
The smart way to save yourself from bearing any losses is to purchase the equipment and material on monthly installments, more commonly known as EMIs. This enables you to pay the money in small amounts, and as and when you make more sales, there is some portion coming back. You can buy most of your equipment like laptops, furniture, machinery etc. on an EMI basis. This also allows you an opportunity to upgrade your equipment with ease.
Incentivize, But Smartly
There are many customers who can be very well persuaded with incentives in most kinds of businesses. While this may seem a little wavy on the line, it will bring in sales as well as persistence in your inflow. One of the most common ways to incentivize your customers to buy more from you is to ask them to pay for a longer time period like a whole year, but offer a discount on the amount. The most prominent example for this is Spotify. While you can get Spotify Premium for Rs.129 for a month, the charge per month comes out to about Rs. 99 a little lesser when you pay for the whole year.
Whatever they may be, whether early discounts, offers on big purchases, or anything else it will attract your consumers to respond quickly and you’re earning faster. That way, the regulation of your business works well, payment comes in well in advance and even your customers are satisfied thus offering a benefit to both, your company and your buyers.
Trim, Trim, Trim, And Avoid
Every business includes smart, rational, and straightforwardness in its policies. It’s only rational to ensure that you’re working to earn maximum profit. A great way to increase your cash flow would be to cut out all your unnecessary expenditures. Do you have to spend that much on packing? Do you need that many containers?
Avoid going overboard on non-essentials that are possibly only a dash or sprinkle on your product and cut out those extra things or materials that are a supposed obstacle and could be taking a share of your profits. ‘Don’t glitter it up, it’s the product that matters at the time of the day.’
Keep A Track
Update yourself regularly on your financial status. Right from payments, bills, deliveries, entries, all of it, know where your numbers are changing. Try to maintain a constant level and period of knowing well as outflow so that there is an accessible balance. Try taking advances to ensure time to time deposits are made and that you’re not falling behind in the inflow stream.
Check your accounts and don’t fall under debt or allow long overdue payments to keep stretching. When the status reaches a certain limit, start acting and taking measures to avoid drowning your well-kept cash flow.
Benefits Of A Good Cash Flow
Here is what you receive by regulating a steady and solid cash flow:
- Estimation of profits: a solid cash flow allows you to know where you stand in terms of expenses and income thereby giving an idea of your profit status
- Better business-oriented understanding: maintaining cash flow helps learn improved ways of doing business not only with suppliers but also customers
- Increased scope for savings: with a better cash flow, you can always have scope to cut-out expenditure and reinvest your profits.
- Maintaining of cash reserves: a good cash flow can allow you to create cash reserves so you’re not blank and confused when issues strike
Also Read: Cash v/s Accrual Accounting
Cash flow can prove to be a great indicator of the health and the future of your business. Therefore it is imperative that you always keep on top of your cash flows and make sure that it doesn’t dip to the negative side.