Cash is the lifeblood of any business. One of the reasons many businesses fail is lack of cash. So, it is important to have good cash flow management. This ensures that your business remains a going concern. However, for business owners, the task of maintaining a positive cash flow can be challenging. This is because a business can record huge profits and yet fail to generate sufficient cash to fund working capital expenses. This article will share some tips on how to maintain positive cash flow in your business.
What is Cash Flow Management?
Cash flow management measures how well a company manages cash (liquidity) to fund its working capital expenses. The initial funds can be from initial equity capital, contributions, and proceeds of loan advances. For some, it may be from sales and collection of receivables.
When your business earnings are greater than your expenses, you have a positive cash flow. However, your business will have a negative cash flow when its earnings are insufficient to meet its working expenses. This situation is unhealthy for any business.
Negative cash flow may arise from bad cash flow management among other factors. These factors may include low sales, stagnant inventory, dismissal debt collection, etc. Negative cash flow slows down business operations and overall growth of the business. In addition, the business runs the risk of insolvency as it will be unable to meet its working capital expenses. Therefore, a business needs to have good cash flow management to maintain positive cash flow.
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How To Maintain Positive Cash Flow
You will below some tips to help you manage your cash flow and maintain a positive cash flow.
Keep Simple But Accurate Accounting Records
A business owner must keep simple and accurate accounting records. A simple and reliable accounting record aids the business owner in the interpretation of the business numbers. Complete and accurate accounting records provide the business owner with financial data required to measure its cash flow.
These records show how funds are generated and your business operating expenses. Also, it shows the funds available, funds generated but not available at hand (receivables), and the working capital cost. Thus, these records help the business owner in planning and maintaining positive cash flow.
Build Cash Reserves
As you seek to maintain a positive cash flow, it is important to build a cash reserve. As an entrepreneur. you need to set aside sufficient funds to cater for working capital and unforeseen costs. This helps you to manage unexpected expenses caused by abnormal events.
One way to build cash reserves is to tighten credit requirements. You can do this by demanding customers to pay cash for goods and services. However, this may have a negative effect in the long run as it reduces customer loyalty. So, you need to ensure that your product or service is really adding value before you go in this route.
Aside this, you can build cash reserves by carefully managing working capital expenses. Having enough cash reserves helps you to build financial confidence to carry out growth expansion.
Eliminate Obsolete Inventory
Most small business owners make the mistake of using cash to purchase a large amount of inventory. This may result in them tying up cash in inventory especially when sales do not meet the expected sales forecast. Nevertheless, selling such obsolete inventory at attractive discounts provides an infusion of cash which prevents negative cash flow.
So, in managing your inventory, you should be mindful of effective sales forecasts as predicted by accounting records. Keeping inventory levels low or in proportion to sales forecast sales allows you to have a good cash flow for operational expenses.
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Manage Customer Payment
Another way to maintain positive cash flow is to effectively manage customer payments. Managing customer payments can help you to maintain a positive cash flow. Cash inflow can be diminished by high credit sales and relaxed credit policies. Businesses are better off with a strict credit policy and low credit sales. This helps to maintain positive cash flow for the business.
You can achieve this by offering discounts on early payments and collecting outstanding payments when due. Also, you can request customers to make deposits on large purchases and minimize credit sales. However, tightening credit sometimes put a strain on customer relationship. Thus, you can offer special sales discounts and promos to loyal customers to maintain customer networks.
Make Wise Invest Decision
Businesses at all stages of growth must invest in capital expenditure. New businesses, which are yet to break even, often make the mistake of investing heavily in capital expenditure. This can create an imbalance between short-term and long-term assets. This, most times, limit liquidity as it is tied up in the purchase of fixed assets.
To prevent such imbalance, you should be shrewd when making long term capital investments. Your capital investments should be proportional to the needs of the business. For example, you can lease some assets rather than purchasing them. Also, you can delay the purchase of some equipment and purchase only what is necessary. This, definitely, goes a long way in helping to manage your cash flow.
Forecast Cash Flow And Manage Forecast Carefully
Cash flow forecasting shows how much money a business expects to receive and pay out over a period. This plan aids the entrepreneur in making business decisions. Therefore, a cash flow forecast is important in maintaining positive cash flow. It helps you to identify early if there is going to be shortage of cash which ultimately prevent negative cash flow.
In addition, forecasting aids with proper budgeting thereby aiding wise capital investment. Cash flow forecasting is a tool for managing business resources which in turn improves business performance, returns, and growth.
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Stop Focusing Exclusively On Profit
As a new business owner, there is tendency to focus exclusively on profit and pay little attention to cash flow. This is an unhealthy behavior for any business because decisions that are profit-oriented can hinder cash flow. Nevertheless, a focus on cash flow will, in the long run, lead to sustaining profits.
As you have seen, maintaining positive cash flow is crucial to the survival and growth of the business. Aside the ways discussed above, you can achieve this by ensuring consistent and timely invoicing, negotiating discounts with suppliers of inventory, etc. Implementing these cash flow management tips would aid to build and maintain positive cash flow.
How have you been managing your cash flow in your business? Please use the comment section to share your experience.
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