CASH FLOW MANAGEMENT

What is cash flow and why is it important? Principal Column Having control over cash flow is an important part of a business’s financial fitness. Cash flow is the money that comes in and goes out of your business, and it determines the day-to-day health of your business, and its ability to last the long-haul. And when cash flow is not well handled, even businesses that are profitable can get into a serious rock-and-hard-place scenario. From startup to full-fledged enterprises, know how to deal with your cash flow to help alleviate pressure, act when opportunities present themselves, and secure your financial footing.

In this post, I’ll be discussing the basic cash flow, some challenges around cash flow and surefire strategies to manage cash flow well.

What is Cash Flow?

In short, cash flow is the net flow of cash into and out of a business. This includes the flow of cash into (from operating activities such as sales, investments, and loans), and out of, (expenses, such as salaries, rent, utilities, loan payments) the business. Cash flow is positive when there are more (inflows) coming in, and negative when there are more (outflows) going out.

The types of cash flow are:

• Operating Cash Flow: It is a cash flow generated by the operations of the business (e.g. sales revenue – the operating expenses (wages, raw materials, etc.) including overhead costing).
• Investing Cash Flow: Investing activities cash flow may be the purchase or sale of assets, equipment, or investments.
• Financing Cash Flow: This involves cash dealings related to the borrowing or retiring of debts, selling shares, or distributing dividends.

Why It Matters: Power of Cash Flow Management

Why Is Cash Flow Important? Having a handle on cash flow is important because it allows you to have sufficient liquidity to pay off your financial obligations, like paying off suppliers, covering payroll, and investing for growth. Controls and Prevention of cash flow help you to:

• Don't go in to (insolvency/bankruptcy).
• Keep a rainy-day fund for unexpected costs.
• Be sure your operations run without a glitch.
• Build positive relationships with suppliers and creditors.
• Take hold of prosperity by making timely investments.

Mismanaged cash flow, however, can cause short-term liquidity issues such as missed payments, damaged credit, and eventually, business closure.

Common Cash Flow Challenges

Before we get into ways to improve cash flow, it’s important to understand the typical obstacles many businesses encounter:

• Unpaid Invoices: This is one of the more frequent cash flow issues, as bills aren’t always paid on time. When customers delay paying invoices, your business can run out of the money you need to pay costs as they come due.
• Seasonal Fluctuation: When you are a business which is subject to seasonal demand, at times you would suffer from times of high CF (the season) but later a low or negative CF (non-season), making it impossible to still sustain operations on a consistent basis.
• Credit-based Over-dependence: A high dependence on credit or loans to run the business to ensure cash flow can result in a large payable debt over time.
• No Cash Laying Around: Not having rainy day funds can be deadly, when businesses encounter unforeseen expenses, or market changes.
• Inventory Management: Companies that are not well managed may lose cash to huge stock accumulation and may not be able to attend to more urgent expenses.

Proven Cash Flow Management Techniques

Now that we’ve reviewed some of the most common challenges, let’s look at some actionable steps you can take to better manage your business's cash flow:

       1- Monitor and Predict Cash Flow Often

At its base, managing cash flow is about knowing when cash is coming in and when cash is going out. This can be done through cash flow statements and projections.

• Cash Flow Statement: This financial report illustrates the real cash that comes in and out during a particular time frame. Regular reviews of the cash flow statement can help you spot trends and problems.
• Cash Flow Forecasting: Forecasting is the prediction of future cash flow based on prior activity and expected future income and expenditure. That way, you can plan for cash shortfalls or excesses and be smart about spending or saving.

Accounting software or cash flow-related tools might help you automate this process and get real-time visibility into where you stand financially.

      2- And here it is: How to Lick Your Cash Conversion Cycle

The cash conversion cycle (CCC) takes the time it takes for your business to turn investments in inventory and other resources back into cash through sales. The shorter your CCC, the faster your business can convert your products or services into revenue.

You can reduce your cash conversion cycle by:

• Faster Accounts Receivable Turnover: Incentivize customers to pay their invoice in a timely manner by offering discounts for early payment or charging late fees. What's more, automate your invoicing process so clients receive their invoices on time.
• To the redemption period: you can negotiate the payment period with suppliers to date development, without it getting in the way. Through postponing payments, you hold on to cash longer, which can improve liquidity.
• Inventory Optimization: Make better use of your inventory, stop over-stocking and concentrate on faster moving products. Extra inventory is a waste of cash that might be put to other uses.

      3- Build Cash Reserves

Having savings in the bank is the key to coming through a financial downturn or preventing unwanted expenses. A solid cash reserve will enable you to service commitments in times of lower revenue, like slow seasons or economic shifts.

Begin by squirreling away some of your earnings monthly. Build up reserves that can cover at least three to six months’ worth of operating expenses. Cash reserves create a cushion that can help your business survive short-term cash flow shortages.

      4- Control Operating Expenses

The most direct way to increase cash is to decrease the non-essential outgo. Review your business expenses on a regular basis and find areas where you can trim your budget without sacrificing the quality of your work.

        Consider:

• Getting more favorable terms from suppliers.
• Cutting down on utility and office costs by going green or allowing work from home.
• Outsourcing non-core services, such as accounting or HR, which minimizes the need for full-time workers.
• Leasing equipment rather than buying it outright, if it allows you to hold onto cash.

     5- Use Financing Wisely

Although borrowing or tapping a line of credit can be a way to fill a short-term cash flow gap, make sure to do it smartly. Heavy borrowing on the other hand, can result in high interest costs and high debt servicing burden that can cripple an entity’s cash flow in the long run.

Instead of taking a loan as your first option, consider the following options:

• Invoice Financing or Factoring: Here you sell your accounts receivable to a factoring company in return for on-the-spot cash. It can be a fast fix to a cash flow problem, without new debt.
• Merchant Cash Advances: In this scenario, a loan provider gives you a cash advance you repay with a percentage of your future credit card sales. The payback is collected as a portion of your daily sales. This is a pricier alternative, though, so it’s most effective for brief cash flow needs.
• Equity Financing: If you need funding for a long time, you should rather take the equity funding from investors rather takes a loan. This approach eliminates the need to make ongoing interest payments, which can help with cash flow.

     6- Improve Pricing and Margins

Your prices have the most immediate effect on your revenue flow, followed by cash flow. When your margins are thin, it’s difficult to sell your way out of the tension: No matter how much you sell, you still might not have enough for your expenses. Review your pricing and make certain you've got enough margin to cover your cost and make a nice go of it.

       Consider:

• Increasing prices where you can, particularly if you’ve added value or improved the quality of your offerings.
• Upsell higher value products or services to enhance the average transaction value.
• Reducing the costs of goods sold (COGS) by using cheaper vendors or becoming more efficient.

    7- Diversify Revenue Streams

It can be risky to depend on one dominant source of revenue. Having different streams of income means that if one falls through, there are others around to catch you.” MORE SIDE HUSTLE STORIES: That helps mitigate risk and provides a more consistent cash flow, he says.

      Consider offering:

• Related products or services to your current offerings.
• Membership models with recurring revenue.
• Joint ventures or any kinds of alliances to enter new markets or customers.

The more revenue you have, the more protected your business will be from market fluctuations or shifts in demand.

Cash flow management: a critical discipline for business success to alleviate cash flow stresses during this challenging time, it also helps to closely manage your cash flow, forecast future needs and act such as shortening your cash conversion cycle, building reserves and controlling expenses to ensure you have sufficient liquidity to guide your business in the right direction for long-term success.