Managing cash flow is a fundamental task that must go on in the business. In simpler terms, the money that comes in and goes out is a demonstration of this. Now, the two important things you must know in this regard are positive and negative cash flow.
In the case of positive flow, your business is making more money than it is spending. The meaning of this is that you can maintain a steady working capital to take care of the usual expenses of the business. Using this, you can refill stock and fund vital activities that are necessary for the growth of the company.
In the case of negative cash flow, cash inflow is less than cash outflow. You have more reasons to spend money than avenues to make revenue for the business. This means you are not prepared for any sudden cash requirement.
Although financial bumps are going to be a common thing, maintaining a positive cash flow is crucial. It can ensure a smooth and productive growth of your business. Now, the negative cash flow issue can be settled with the effective implementation of some steps.
However, if it persists longer, it can impact your business. Thus, do not take any short-term necessity lightly. If needed, you can seek options like small business start-up loans.
They should be taken out in an amount that should be enough to eliminate the crisis. Keep reading this blog to know more about the other steps you can pursue.
Managing cash flow and its significance in small businesses
Think of the uncertain events that can shake the foundation of your business. Bigger companies oftentimes sail through such situations with the help of the safety net they have kept aside. You have to create a financial plan that can help you navigate difficult situations.
A cash flow condition can provide you with the base to work on this creation. Your business should become agile so that you can take the right steps at the right time. However, when you run a small company, you might not get enough scope to save substantial funds.
It is for this reason, taking care of the cash flow is so vital. Otherwise, you might face a shortage of resources to cope with financial emergencies. Keep tracking the status of the cash flow so that you can be prepared for the unexpected.
In this regard, you must figure out how revenue and profit are different from each other.
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Revenue Vs Profit
When exploring cash flow, you might get confused between these two terms. Again, many of you might get confused between income from business and revenue. The former is included in the latter.
The money that your business earns is directly from various sources, such as sales or investors. On the flip side, the money that remains once you clear up all the payments for the business is profit. Now, if whatever revenue you have generated has gone to meeting expenses, your profit will be zero.
It will clearly show that your company is just going on. There will hardly be any signs of growth.
The ways you can handle cash flow in a better way so that it delivers positive outcomes for the business are given below.
· Cash flow forecasting
To be able to prepare for the unforeseen, you must know what could happen. When you do not have a clear idea about something, forecasting can help. Financial projections are like ideating what worse can happen and how you can tackle it.
It is not that you will simply assume and prepare. Note down your assumptions to clarify what should be included in forecasting. Study the market so that you can predict when the price might rise.
This will help you get ready financially ahead of the time when you might need to purchase raw materials. Without research and analysis, forecasting will have no meaning. Then, you will not be able to find the right price to charge your customers.
While forecasting, you should not overlook when or how sales might drop. The season could be one of the potential reasons as the demand will fall. At the same time, you must not ignore any period that might encourage an increase in sales and, thereby, increase revenue for the business.
· Keep a tab on revenue and expenses.
You already know what revenue is. Now, understand how critical it is for the maintenance of the cash flow. If revenue is generating and growing with time, your business is growing.
A fluctuating revenue is not a good sign, and you must get to the root cause. Otherwise, if you keep this problem unattended, this is going to have a damaging effect on your business. While analysing revenue, check the payment cycle followed by consistent clients.
If they use to return after 60 days of getting the deliverables, you must work on fixing this problem. This will help maintain a positive cash flow.
Revenue is about your earnings, and thus, it is equally important to talk about expenses. Find out the different types of payouts you manage for your business. While calculating expenses, you must not forget to include interest payments and premiums you pay for your business.
You can use the bank statements from the previous year as a reference. This can help you predict the upcoming and outgoing for the next year.
· Speed up the receivables
You might have clients who usually take a lot of time to complete payments. This late receipt of payments can delay the production process. Gradually, this will hamper the usual growth of your business.
This is a real problem, and you must not ignore it at any cost. If you think that by asking them to pay on time, you might lose them, try out some tricks. Tell them that they can enjoy discounts or bonuses by paying in advance.
You can even suggest they meet half of the payment outright and get access to exciting offers. Keep sending them reminders and follow them up regularly. They should not think that you care less about the payments.
· Experimenting with the price can help
You might feel hesitant to increase the price of your deliverables by thinking that ideal customers might not be able to afford them. However, after a certain point in time, you must keep increasing the price, or customers will undervalue your offerings.
Besides, when you elevate the price, the number of customers might decline. However, you are making more money even with fewer customers. This increase in price will be seen as a rise in demand for your deliverables.
This might encourage new customers. Besides, this newly set price might help potential customers to discover your business. At the same time, you should not feel reluctant to offer some discounts by lowering the prices.
Keep experimenting and studying your competitors to find that ideal price tag for your deliverables.
The bottom line
This is about the money that you have to pay to run the business. It will include both usual and emergency expenses. Keep monitoring the expenses so that you can eliminate unimportant expenses on time before they could cause any damage.
Thus, you should notskip this step of handling your payables. It is a good practice to cut payouts that do not prove to be worthy for the business. Maintain a friendly relationship with your suppliers and vendors.
