Easy ways to manage cashflow of your business
The first issue affecting the small and medium business is the cashflow management, as per the invoice market research, $76 billion worth of outstanding invoices and two million businesses come under the unpaid bills. Believe it or not, half a million more jobs will be produced, reducing Australia’s unemployment rate to almost zero, if the cashflow issue is fixed.
Cashflow is the money flowing in and out of the business in a month, sometimes it seems that the cashflow goes in one direction -out of the business it does flow both ways.
- Cash is coming in via customers or clients who are buying the products/services from business. If the purchase is done in advance, then the cash comes in from collection of accounts receivable.
- Cash is going out of the business via payments of expenses like- rent or mortgage, in monthly loan payments, operating expenses, payment in tax and other accounts payable.
Cashflow is a very essential element for any business, it can be also stated as the lifeline of a business. One big reason a small business fails is lack of cash. It is also termed as “running out of money” and this results in shutdown of the business faster than anything else.
While starting a small business, handling the cashflow is the most difficult part, there are many expenses and money is going out fast- the business might not have a measurable sales or recurring customers, so the cash inflow is either too feeble or almost negligible. In that case, a small business needs to find another source of cash like through line of credit to get going and making a positive cash flow situation.
The initial six months of the business is very crucial time for the cash flow. If the cash is not enough to pay the expenses, then the chances of business success is not good and there will be a lasting cash crunch.
Why Cashflow is important?
1. Better plans and decisions
For any business to plan and decide its course, an accurate information on the cashflow statement is required. With the correct information on the cashflow, a business will know exactly how much fund is available at any given point of time.
If a business doesn’t manage the cashflow carefully, then it will end up making a bad decision risking everything in the course.
The selling price is determined by adding a markup to the unit cost, there are three steps involved in cost-plus pricing
2. Better understanding on spending the money
It is important for any business to know where the money spend is going and why it is going. Managing cashflow efficiently will give a better understanding of where the money is being spend currently -something that is not shown in profit and loss statement.
3. Protect business relationships
Business relationship with both new and potential customers allow businesses to grow. Every business must deliver a great end to end experience across every touchpoint to all the customers and vendors.
If there is a problem in cashflow then there will not be available funds to the vendors, this will harm the business relationship with them and will affect the overall reputation of the business. It is important to have an advance planning so that the business doesn’t face multiple invoices or bills all at the same time without funds to deal with them.
4. Expansion of business at right time
Expanding the business is as much exciting as its crucial. This means new market, new products, new staff members and more revenue. However, expansion at a wrong time or in a wrong way will backfire.
Right management of cash flow give provides this business-critical information by accurately letting you know the right time for expansion.
Managing and forecasting the cashflow
It is very important that the small business maintain a steady flow of working capital by paying vendors and purchasing materials to meeting the payroll and maintain the operational expenses. Cashflow management and forecasting has two simple goals.
- To encourage the customers to pay their invoices as early as possible.
- To delay outlays of cash for as long as it is reasonable and fair.
Cashflow management system must focus on these two issues and need to find solution to this.
Tips on cashflow management system for small business
There are various techniques for managing the cashflow that a small business can implement, here are the best ways to improve the cashflow management system.
Invoicing is an important part for managing the cashflow. To improve the cashflow management, invoices need to be processed on time so that your business will receive the payment from the customers as early as possible. Implementing automated invoicing will improve the turnaround time and reduce delays in sending invoices.
2. Update your books
A business needs to ensure that the accounting information is updated on regular basis. This will have a clear picture into the financial health of the business and will help to have a better forecast on the future cashflow. Bank reconciliation to be done regularly or else there will be a misconception that there’s more money in the accounts.
3. Accounts receivables (A/R) process
One of the most important elements of any successful small business is the accounts receivable process. It is very important to ensure that accounts receivables process is up to task. A/R refers to all the outstanding invoices the business has to collect. Credit policies should be very clear and concise. Optimising accounts receivable is an excellent way to ensure cashflow is managed correctly.
4. Cash reserve
Every business must set aside some funds for the use of emergency situation, this fund is used to cover the cost or expenses which comes into the business unexpectedly-the cash reserve are specially for the short-term needs. One of the main benefits for maintaining the cash reserve is that the business can avoid credit card debt or additional loan debt. It is there very important for the small business to keep filling the cash reserve from the cash flow.
One way to manage the cash reserve is to automate it -business can instruct the bank to withdraw the money at a periodic interval.
5. Liquidate cash
It also refers to the assets of an organization that can be easily converted into cash with a loss of little to no value, Savings account is a type of liquid asset. If the business is tied up in unused assets, such as buildings or equipment and can’t sell easily or it has high expenses-this will leave the business with little cash.
Cashflow statements help to measure the business liquidity and it does impact the cashflow. If the business does not have sufficient cashflow to cover an obligation, it can liquidate an asset to increase the cash on hand. The more liquid an asset the easier it will be for the small business to convert it to cash and improve the cashflow.
Components of cashflow
Cashflow is one of the primary financial statements used in business operations, it is divided into 3 components: Operating, investing, and financing activities.
1. Cash from operating activities
The first section consists of the cash received and spend during the normal operating activities. This section details in the ledger account balances for your current assets and current liabilities. When the business sells products and services this activity gets recorded here.
2. Cash from investment activities
The second section is investment activities, all the company investment is recorded here. For e.g.: purchase of sale of property, equipment, and plant. The ledger account to review this section includes long term investment account, vehicles, capital equipment accounts, land, and buildings.
3. Cash from financial activities
The third section of cashflow is the information of the business financial activities, it includes purchases of shares and stock as well as dividend payments. For a small business one of the most of common financial activities is from small business administration
It is very evident that the cashflow is very much crucial for all the companies of sizes but more importantly for small business. We need to make sure that the business is taking action with the right tool. Research has found that the business fail do so is because of the cashflow issues.
*NETCorp is not an accounting firm, HR specialist, or financial advisors and therefore we encourage you to do your on fact finding research