TEN TIPS TO DEAL WITH THE FIRM’S CASH FLOW ISSUES
Cash flow is the amount of money that goes into a business and amount that comes out of it. Sometimes it seems that the flow of cash is one way, although a close inspection tells us that it flows both ways. People often confuse cash flow with profit; however, both are different terms and are equally important for the success of the business. It is crucial that business owners understand the importance of cash flow, as business success largely depends on it. A shortage of cash flow is a paramount reason that businesses, especially small businesses, break down.
A cash flow report helps in making management decisions of business in critical times. It helps in figuring out the flaws in management, and a keen eye on the report points out the areas that need some improvement. Positive cash flow shows that a firm’s liquid assets are flourishing, while negative cash flow indicates that the liquidity of a business is decreasing, which can lead to bankruptcies. The stable cash flow of a firm puts it in a position where it can negotiate with lenders on its terms. When a cash flow statement indicates healthy cash flow, firm owners make decisions for the expansion and growth of businesses.
An old saying about business is that cash is king, and when cash is king, then cash flow can be symbolized with blood that keeps the heart of kingdom pumping. Positive cash flow is crucial for businesses, but many firm owners find it challenging to maintain it. Several banks and other financial institutes offer services for it. The business owners can also get Cash Flow Loans for business from such institutes. Financial departments and firms often look for tips for tackling their firm’s cash flow issues, and here we are listing down a few tips that will help in dealing with these problems.
- Set Targets
Preparing and maintaining a cash flow forecast helps in controlling it. According to the advice given by experts, these forecasts should be updated after an interval. This gives a better insight into the performance of a firm and owners are in a position to take adequate measures for upcoming months. Another advantage of setting targets for credit controllers is that it is an outstanding way to make sure that company matters are scrutinized. On the other hand, it gives owners a sense of ownership.
- Maintain Cash Flow Worksheet
Business owners understand the importance of cash flow, yet they find it challenging to keep an eye on it. In many cases, they do not realize the decline in cash flow until it is too late. A cash flow worksheet is a tool that helps in keeping tabs on general cash flow management. Advanced technology has made a lot of tasks more manageable and less time-consuming. Excel is a great platform which gives the facility of making customized sheet. Wise business owners fill up these worksheets regularly to make sure that things run evenly.
- Encourage Customers to Pay Faster
Maintaining or increasing cash flow can become daunting at times; however, changing a few strategies can improve it. Offering customers early payment discounts motivate them to make payments as quickly as possible. Keeping credit requirements tight averts debt and forces the company to manage in a certain amount. Business owners benefit from having set standards that help in determining who is suitable for credit. However, the key is to follow these standards strictly.
- Cut Expenses
Cutting expenses may not be possible in every scenario as sometimes expenses are the need for a firm. If a business owner finds himself unable to lower costs, he should consider delaying them. Manufacturing companies can go for lower-cost options while maintaining the same service and quality. Another way is to use existing resources to the last bit, before purchasing new inventory.
- Negotiate with Suppliers
Businesses flourish when owners and suppliers both benefit from a firm’s strategies. Devising strategies that offer value and acquire concession results in a stable flow of cash. Another way is to reach the new market as new suppliers tend to provide goods at relatively less price. Some businesses persuade suppliers to keep the price low and offer them a long-term contract, which is a win-win strategy that helps in enhancing cash flow. Having a good relationship with suppliers is also healthy because owners can amicably negotiate with them.
- Creative Incentives
Many business owners do not try to innovate strategies and propose creative ways to offer incentives. The truth is people are attracted to new and different things. Thinking out of the box while providing fun incentives can boost up sales. A fun contest, sponsoring an enjoyable event or referral incentives are a few ways that will sustain customers and attract new ones too.
- Keep the Bank Informed
Firms and banks need each other to be successful. Banks can assist firms when they need it. They offer a variety of useful services like overdrafts, credits or loans with some conditions. Experts say that keeping the bank in the loop about any sudden outflow of cash or changes in forecast help in strengthening the bond between the bank and a firm. Another tip is to communicate with the bank more often and inform it about your expenses; banks tend to appreciate it.
- Increase Price
Business owners fear that the increase in price might result in negative cash flow. It is about a balance about increasing cost and devising such a strategy while doing so that it does not cost customers. Timing is of utmost importance, and it requires diligence on a firm’s part while having a hike in price. Another point is experts do not advise raising quality standards while maintaining price.
Cash flow problems arise when firms do not stay on top of payments. Having an invoice that states clear payment terms mentioning the preferred payment method, and the date firms want cash paid is another step in increasing cash flow. Firms need to be persistent with clients as some clients do not pay on time and can be a nuisance in dealing.
- Sell Excess Inventory
Many manufacturers do not realize that they are in possession of extra machinery. When the cash flow is negative, it is better to look into it and sell excess inventory. The ideal situation would be to avoid this in the first place, but when the cash flow is declining, these extra goods serve as a blessing. Another way is to figure out ways to reduce inventory.
Business owners realize the importance of cash flow, but sometimes they do not have a grip on it. The studies have proven that poor management of cash flow was the leading cause of the failure of many huge businesses. An expert has presented an interesting analogy that running a business without having a hold on cash flow is like paddling a boat without an oar. Firms may succeed, but this challenging exercise will exhaust them. Practising a few tips like reducing the cost of payroll, determining breakeven point, increasing margins will not increase cash flow but also help in avoiding potential cash flow issues.