Do you want to find out whether your business is profitable or not? If yes, you are in the same boat as millions of others. However, to determine business profitability, cash flow is one of the most important financial KPIs. If the business isn’t doing well, there will be a gap between the payments and receivables. So, if you are one of those businesses that need to track cash flow, you are missing out on a crucial indicator. But if you want to use it as an indicator, then firsthand, you will have to start understanding this concept from scratch:
Read also: The Ultimate Guide to Borrowing Money for Your Business: What You Need to Know.
What is a cash flow? A breakdown of the definition:
A proper cash flow strategy is a crucial thing that helps to succeed your business in the long run. But at the same time, cash flow management is one of the biggest challenges. In precise words:
“Cash flow is a process in which money moves in and out of business.”
But according to the study by Intuit, more than 61% of small businesses worldwide struggle with cash flow. So, deal with the cash flow firsthand to combat this problem. Furthermore, here are the following points that show the importance and depth of a cash flow system in an organization:
- If the cash flow system is perfect, you will know when the money is coming and going out of the system.
- You know when cash will be in hand, and it will help cover expenses.
- If the cash flow system is intact, you can efficiently operate the business on both cash and credit models.
In short, a cash flow system is vital for your business and helps to steer the company in the right direction. So, you can stay ahead by understanding cash flow techniques and strategies.
Types of cash flow activities:
We know every business has a high and low time, but if you see the company’s expenses and revenues, you can handle them well. Here are the following types of cash flow systems, and you can choose the best one as per your business needs:
We deal with non-current liabilities and owner’s equity in cash flow financing activities. But in investing activities, we include cash activities that are related to the non-current assets. The operating cash flow type has activities that are related to net income. Cash flow measures the net transfer and cash equivalent transfer of a business. You can quickly enter your manual or online pay stub generator system if your cash flow is sorted. The timely activities are best for keeping employees happy and the business financially sound.
How to improve your cash flow system? Tips to follow:
A company’s cash flow could be positive or negative as it’s more than just profitability. For instance, even if the business earns a profit, you are still at risk of negative cash flow. It happens when you need more time to meet future obligations. Thus, if you want to deal with all these problems, then here are tips to follow:
Send invoices ASAP:
If you want to sort out the cash flow, try sending business invoices as soon as possible. According to the stats, around 80%-90% of businesses need a proper system to process their invoices. Small companies use traditional methods like pen and paper, excel, and spreadsheets, and as a result, they lose track of invoices. However, business owners should track daily whether they have sent previous invoices to the customers.
Lease your equipment:
It is another common mistake that most business owners make. Buying equipment could be a profitable move in the long run. But in the short run, it could be better because you will have to deal with maintenance costs and updating expenses. Leasing equipment can lessen your financial burden because, in this way, you will not have to handle upgrades. Apart from this, a lease usually lowers the tax burden by qualifying for tax credits. As a result of these unwise moves, you will have less money in your bank account, making it more challenging to manage your cash flow.
Re-evaluate business operations:
If you want to get your business out of the crisis, then manage your cash flow system and a few other things. Experts suggest you get freelance services or outsource tasks because it will help to increase savings. Moreover, third-party outsourcing saves money regarding salary and employee benefits. Besides, improve, monitor, and evaluate other vital business areas along with outsourcing. But remember to change the business strategies if there is a change in the economic situation.
Restructure payment & collection system:
Maintaining a healthy relationship with your vendors and suppliers is crucial, as it’s the best way to avoid penalties and late fees. Here are the tips to follow for restructuring the system:
- Develop a more balanced income for your business
- Try to restructure payment costs if you are unable to restructure dates
- Meet new vendors and try to get inventory at a lower cost
Above all, always choose the best collection process because it makes much difference and helps to improve cash flow. So, take prompt follow-up action and enhance the payment and receivable system.
Forecast sales:
If you don’t have a system to analyze weekly, monthly, or yearly reports, then there is a nig hole in your strategy. So, always forecast your sales, collections, and account receivables ahead of time. This way, you will know the date when you will receive the payment in the system. It helps to keep the liabilities, payouts, and actual expenses sorted.
Apart from the above tips, here are other methods to help you maintain and manage your cash flow system.
- Try to buy on credit terms. This way, you can get a discount by paying early.
- Cut down on the costs of processes.
- Take the help of technology and automate procedures
- Monitor your money
- Borrow money ahead of time
- Adjust inventory as per your needs
According to a study by USA bank, around 82% of companies fail due to poor cash flow management. So, act smart and maintain a proper analysis system to help your business grow. After learning cash flow management, you will soon be able to reap the benefits.
