You must have heard that albeit being profitable, the businesses could not go on as they just run out of cash. This may sound ridiculous at first sight, but, managing cash flow effectively is important for the survival of business. It is important for all levels of organization, either small or large. And believe it or not, failure of business due to cash crunch would be the stupidest idea to let yourself and your business down.
Managing cash flow means managing working capital funds in and out of your business. This includes the aspects related to accounts receivable, accounts payable, office expenses and so on. Tracking cash flow should be done periodically based on size of the organization. It is advised that small businesses should track the cash flows on monthly basis due to small number of ins and outs of funds. Some of the basic things that small businesses should know about cash flows are:
- Profit and cash flow are different things. Hence, businesses should prepare cash flows periodically to track the movement of cash.
- If you do not have positive cash flows or say cash in hand, it would become difficult to run the business on daily basis without any cash. Hence, invoicing lays fundamental basis for smooth business functioning.
- Small businesses must plan for cash requirement and disbursement. This can be done by making Cash Flows anticipating inflows and outflows. Small business can easily prepare this using format in spreadsheets or accounting software.
Here are some of the aspects small businesses should focus on to manage cash flows effectively :
- Keeping Books Updated: Small businesses should regularly update the accounting information. This helps to get an eagle eye over financial state of business.
- Determining the breakeven point : This can be done by making cash flow projections. It is made giving due relevance to purchases of raw materials, credit policy and outflow of cash expenses on daily basis.
- Managing Accounts Receivable: Small businesses should have appropriate credit policy, generally up to 30 or 45 days. Small discounts can also be given to ramp up the payments. Hence, a suitable invoicing strategy shall be developed. Moreover, small businesses should not be afraid to take legal actions if necessary. Ageing receivables only means deteriorating debtors, hence, acting sooner is smart. Discounting the bills receivables should also looked on by small businesses.
- Managing Accounts Payables: Small businesses should smartly make the payment to its creditors on due date unless there is special incentive to make the payment early. This aspect is generally ignored by small businesses. But, it is necessary, when the small businesses are on the verge of scaling up their business.
- Maintaining Cash Reserves: Just like rainy day savings, small businesses should also have small cash reserves maintained to tackle out unforeseeable circumstances. This protects the business from the whims of lenders who can fail to make the payment and also provides avenues to stand up to opportunities.
- Using the software and applications : Small businesses should create an alert for various events like due dates of payable and receivables, working expenses and so on.