As an entrepreneur, you must understand how to manage cash flow in your business because, managing cash flow is essential to the growth of your business. With good cash flow management, you can keep track of your business income and expenditure. It ensures that there is an availability of funds for ease of business operations. There will be funds available to fuel operations, purchase production materials, pay suppliers, and pay employees if you manage your cash flow well.
Every profitable business needs a stable cash flow. You must ensure that the income from sales and receivables is in equilibrium with the cash expenditure. This cash expenses could be through payables, employee salaries, and other expenses. It is not enough to make profits. You must keep track of how you use funds in your business.
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How To Manage Cash Flow In Your Business
Below are five tips to help you manage cash flow effectively in your business.
Assess Cash Flow
The first step that helps you manage cash flow as an entrepreneur is a financial analysis. Assessing cash flow in your business helps in making informed financial predictions for the upcoming year, month, or even week. Run an assessment by adding cash at hand to the estimated profit from your sources of income. Be sure to also account for periodic fluctuations in sales. With this, you will be able to compute comprehensive data on customer payments, interest earnings, and upcoming expenditure.
Making financial predictions can be quite hard, but it’s essential to draw a financial plan for your business. With the help of your accountant or bookkeeping software, you can estimate cash influx and deficit. Also, ensure to keep a record of debts. Additionally, payment for goods and services purchased on credit should be paid as at when due. You must update your financial records regularly.
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Speed Up Receivables To Manage Cash Flow
You can also manage cash flow by speeding up the rate at which supplies are converted into products. It also includes converting inventory into receivables, and receivables into cash. Thus, making more money available for the daily running of the business. There are tips for doing this, you can offer discounts to customers who pay their bills on time. If you choose to give price cuts, ensure that the gain outweighs the cost.
You can also run a presale or pre-order for your products. The profit made from the presale can cover the production cost or cost of logistics. For large orders or long-term contracts, you can agree to installment payments.
You could use a policy of cash on delivery (C.O.D.) as an alternative means of payment. If you provide delivery services, ensure to use mobile payment apps for easy credit transfer. This ensures that customers pay immediately when their order is delivered. They can pay with their credit cards or through mobile banking apps on their smartphone.
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Manage Payables
When managing a small or medium-scale business, you must tread carefully with your expenses. Do not just be satisfied with converting sales as increased sales may not always translate to more profit. Ensure that the figures translate to actual income. You may be making sales while your business is operating at a loss. When your expenditure exceeds your income, you must take a step back to evaluate your cost. Run a careful analysis to identify places you can cut costs. Look out for non-essential expenses and utilities you no longer require.
Apply the economics of scale and weigh your opportunity cost. Prioritize your needs and rule off the non-essentials. Try to cut the cost of production and other operating expenses. You can negotiate cheaper rates with your vendors, suppliers, and agents. Discuss your financial situation with them, and together you can come to a mutual agreement.
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Manage Deficits
In business, you must anticipate financial deficits. It’s all part of the hustle and bustle. A financial loss is not an indicator of business failure as long as it is properly managed. You may not always be accurate with your financial predictions. It’s a game of probability, and unforeseen circumstances are bound to occur. There are daily business practices that can help you manage such situations when they do occur.
Identify the problem from the get-go and proffer a pragmatic solution. When there is a financial deficit, you must trim all excesses. Cut down all excessive expenditures and manage your cash reserve. Review your terms of payment with vendors and agents. Cut back on outsources and substitute all financially demanding processes for simple and cheaper options. You may also have to review employees’ salaries or downsize.
Always be prepared for the rainy day. Prepare a solid insurance plan and layout funds for emergencies. Spend your cash reserve wisely, and seek alternative funding options. You can apply for government aids for small businesses. Seek financial assistance from family and friends. There’s also the option of crowdfunding which can be worthwhile.
Another option is to request loans from financial institutions. Loans should be your last resort when all else fails. To assess funds from financial institutions, you must have a clean financial record. Thus, ensure that your account books are up to date and well-organized.
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Earn Off Your Assets To Manage Cash Flow
If you have old, damaged equipment or outdated inventory, consider selling it to generate quick cash. These items take up space and tie up capital that you could use more productively. Old equipment will usually have a book value equal to their recovery value or less. So, selling them might result in a taxable gain. However, if you sell below the book value, you will incur a tax loss, which can be counteractive to your aim of generating profits for your business.
Cash flow management in business is arguably one of the most essential and intricate aspects of your business. It is something every entrepreneur must regard seriously. A positive cash flow ensures your business makes more profit and that you have money to run your business.
Also, it ensures that there is a disposable fund which can be used to pay bills and perform daily operations. The best part is that you have access to sufficient funds for expansion. Effectively managing your cash flow is crucial for the success of your business.
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