5 Ways to Manage Cash Flow
Why is cash flow management important? You could ask. Well, a business’s cash flow is different from income or net profits. Business income is calculated based on various items, the major one being revenue, mainly from sales of goods and services, some of which may not have been paid up. As such, some income from sales may not already be in the company’s bank account. But a company needs to use money already in its account to manage its daily activities and pay employees. That is why cash flow management is crucial because it is all about cash readily available for use by the business.
Therefore, what are the five ways to manage cash flow?
1. Employ systems to monitor it regularly.
When many people hear the word ‘system,’ they freak out, thinking it’s something gigantic you have to take years to learn. But that is not true. A system is a way of doing things; for example, you may use QuickBooks to let all your business transactions flow through. In the end, you will use bookkeeping (with QuickBooks) to monitor your cash flow by having a cash flow statement readily available at all times. In fact, Quickbooks always shows you the actual balance in your business account. By so doing, you know if you can meet your immediate cash obligations or not.
2. Manage Costs
Cash flow management is not only about monitoring the money readily available but also about limiting how you spend and maximizing savings. Therefore, cost-cutting is another means of managing your company’s cash flow. Financial statements always tell you where most of your money is going. They will have a summary of rentals you paid, how much you paid to produce your goods, including which stage of production cost you the most. You can use this information to find out how you can, for example, reduce the money you spend on rentals, payroll, or other utilities. Doing this successfully may protect your cash flow and ensure you have money to fund current business operations.
3. Get business lines of credit
This is entirely dependent on the kind of business you do. If you rely more on other companies’ inputs, you regularly make payments to suppliers. If this is the case, you better negotiate lines of credit with suppliers. A business line of credit protects you from buying in cash every time you need to get supplies for your business. You can get the inputs on credit and have, for example, thirty days to settle your bills. This gives you more time to manage your cash at hand. You can channel some money to other business needs. Moreover, business lines of credit are an advantage for you if you can negotiate with suppliers to send your credit history to credit bureaus. It helps boost your business credit score, which works in your favor when you require business credit to fund, for example, an expansion or the decoration of a new office.
4. Ask for deposits on orders.
Cash flow management is all about ensuring that your business has money to cater to all its activities. If you need to buy lunch for a client today, there must be money in the business account to fund that. But, do you know that production takes priority? For example, if you are a landscaper, you will always ensure that your equipment is ready to work. If you use a gas-powered lawn mower, you would always want to ensure it has gas in it.
So, imagine being hired by a client and asking for NO deposit? WHich money will buy gas for the lawn mower? Obviously, you will tap into the business’s credit card. That action reduces the amount of cash you have. But you can avoid a phenomenon where cash is reduced by ensuring that every customer pays a deposit. You will use that deposit money to purchase inputs to be used on their premises. So, always ask for deposits before commencing work.
5. Get business credit cards.
The purpose of a business credit card is not for you to splurge on it each time you have an opportunity. You must have it and just keep it for a rainy day. A business is vulnerable to cash flow challenges from time to time, especially small businesses. That is when you should tap into the business credit card to cover the gap. Use it to buy pressing inputs or equipment and ensure that your business is flowing smoothly. Remember, misuse of company credit cards may result in an unwanted debt burden on the business. It would help if you avoided this by all means necessary; the credit card is only there to cushion your cash flow.
Do you have any questions about managing your cash flow? Contact me and ask all accounting questions for your business. Contact my team now.
Frequently Asked Questions
1. What is cash flow?
Cash flow measures the increase or decrease in a business entity’s cash amount during any given period, usually a quarter, half-year, or 12 months.
2. What are the four types of cash flows?
The four types of cash flow are Cash from Operating Activities, Free Cash Flow to Equity (FCFE), Free Cash Flow to the Firm (FCFF), and Net Change in Cash. All these cash flows are found in different places in the cash flow statement. For example, a Net Change in Cash is located at the bottom of the cash flow statement, and it is a numerical measure of the change in the cash flow from one accounting period to the next.
3. Why is cash flow essential?
A cash flow helps the business meet its current business objectives, for example, paying employees, and also helps it plan for the future.
