New and small business owners often lack the experience to ensure stable cash flow. This is critical to a successful expansion of the company and at the same time reduces the need for additional funding. Lack of working capital can slow down business development plans and reduce profitability and potential. In this article, you’ll get familiar with the concept of cash flow and find out some tips to help you create stable cash flow and avoid working capital shortages.
The concept of cash flow
The cash flow means the movement of finances over a certain period of time. This is the difference between the amount of income and expenses. This can be well imagined using the example of a school problem in mathematics. There is a pool and water is poured into it from pipe A (that is, financial resources), and from pipe B it is poured out. If more water has poured into the pool, then we can talk about a positive cash flow, and if more has poured out, about a negative one.
In other words, this is the turnover of the enterprise’s money, on which its financial well-being directly depends. It is largely determined by the extent to which the company can fulfil its obligations, primarily of a financial nature. If money is sorely lacking, this indicates material difficulties that do not add optimism about the future. On the other hand, a surplus of funds may indicate that the company is suffering losses, since these funds are used irrationally.
Your goal is to always have a positive cash flow. Also, it is very important that it is stable.
How to maintain a steady business cash flow
Set the ratio of available funds
Anticipate and always maintain an appropriate level of working capital in your business. Make sure to always prepare plans and budgets on time. When preparing business plans and budgets for the next year or quarter, set goals that determine the level of available funds that you want to achieve over a certain period of time. Clear targets for the indicator will require closer monitoring of cash flows. But, this way you will know exactly how many funds your business can count.
Plan your commitments
Calculate how much money your company “burns” in one month. It is important to estimate when the company will have the greatest need for cash flows (the date when it will have to pay VAT or other taxes, pay large invoices for orders to suppliers, spend significant amounts such as new production equipment, renovation of premises, and so on). When discussing settlement terms with clients, try to agree that they do not coincide with the dates of the above commitments to avoid the risk of unplanned liquidity problems. It is extremely important that everything goes according to plan.
On-Time Billing
This is a fairly simple thing, but the invoice issued and sent after a few days determines the amounts that will be received later. This negatively affects stable cash flow. The accumulation of several of these accounts can significantly contribute to an imbalance in the cash flows of a business. To avoid these mistakes, take the time to review your orders and submit invoices every week. Store all information related to orders and invoices in a virtual space or in one place. Using innovative accounting software will enable more efficient account management processes and reduce the likelihood of errors.
In case customers want to pay on postpaid or due to the completion of the transaction and the nuances of the transaction it is impossible to ensure immediate payment of bills, and invoices are issued from 15-120 days of postpay, consider using various alternative financial solutions developed for such cases. These include export finance, trade finance, factoring or invoice financing, and others.
Debt management
Arrears often become a problem for companies that do not have working capital. Finding debtors and getting them to pay can be difficult, so decide ahead of time what to do with late payments. Adopt and adhere to an arrears management policy and immediately plan what to do if a customer is late in payment within the correct number of days. Also, you can always turn to professionals. Debt recovery from Brisbane will be there for you.
Spread the calculations
Try to schedule payments on time rather than invoicing everyone at once. First, make payments for the most important things – salaries, taxes, other fixed obligations. See if some of your providers can offer more flexible payment terms to help you better pay for your obligations.
Conclusion
Difficult situations can negatively affect your business and stable cash flow, and a lack of working capital can lead to the search for an additional source of funding. To avoid unnecessary credit debt or liquidity risk, plan your finances wisely or, if necessary, discover the potential for alternative financing that does not require collateral and does not create loan commitments.
