Controlling your cashflow is vital, particularly in the early stages of your new business
To really understand its role, think of cash on hand as a small business vital fluids - the more cash on hand it has, the more liquid a small business becomes. A favorable liquidity level means the business is able to settle the current portion of its obligations when they become due, thus allowing for smoother operations. Good cash flow simply means the business is able to maintain adequate cash on hand.
Cash flow happens in two directions: inflow and outflow. Cash inflow means the amount of cash coming into the business. It occur when a business receives money from sales, collects invoices, receives interest, raises additional funds or sells a capital asset. Cash outflow, on the other hand, is cash going in the opposite direction. This happens when settling debts, paying for purchases and other expenses, or withdrawals made by the owner.
Good cash flow management begins from understanding the above concepts. Again, the aim of proper cash flow handling is to improve the small business liquidity in terms of adequate cash reserves. This means closely managing cash inflows and outflows.
Proper management of cash flow involves optimizing the activities that bring in cash. Collection of accounts is where many business look into when trying to increase their cash reserves. Small businesses need to make sure that their billing and collection protocols are working efficiently. In addition, incentives such as sales discounts should be implemented to encourage customers to pay earlier. Also, small businesses must set more rigorous credit requirements to reduce the risk of uncollectible accounts.
Small businesses can also increase their cash reserves through other operating, financing, and investing activities. Increasing sales through higher volume and more aggressive pricing schemes can help generate cash inflows.
Cost reduction in such items as inventory, storage, overhead, and running expenses can also result in positive cash flow. In addition, small businesses can gain access to much-needed cash from making short-term loans to address minor cash flow blips. Additional cash can also be generated from raising funds or investing any excess cash.
Lastly, cash outflows need to be managed in such a way that the business maximizes the value of the cash being held. This applies when handling payables to suppliers, utility providers, lenders, and taxing authorities. The idea is to keep cash in the business hands for as long as allowable. Maximizing payment periods, taking advantage of discounts, etc. can help increase cash reserves.
All in all, good cash flow ensures smoother operations for small businesses. By keeping a close eye on things that affect the flow of funds, a small business manager is able to properly handle one key aspect of its financial management. Failure to do so could have a very serious impact on the enterprise.
Tony is an acclaimed author of the book YOU CAN DO ANYTHING (which he wrote in just 30 days). He is a licensed Integrity and Values Consultant and specialises in coaching businesses on hiring, retaining and developing staff to increase bottom line results.
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