Payment Cashflow is king! This phrase aptly describes the importance of strong cash flow for growing organisations. With a positive cash flow, businesses are in a better buying position and enjoy greater protection against loan defaults or foreclosures. Managing the cash flow is critical to the survival of any business. You must have heard about businesses running out of cash, and losing its profitable position in the market.
They end up using a large amount of their working capital, and makes the company vulnerable to a cash crunch where they are unable to buy materials, pay suppliers and their employees on time.
Cash flow management becomes extremely important for corporate leaders to continue operating their business. By simply delaying the outflow of cash as long as possible and inducing your customers to make the payment quickly, you can keep the cash flow positive for a while. But, these are not the concrete steps towards positive cash flow management.
Now that you are keeping an eye on profit prospects in the year 2018, try to get rid of detrimental payment cashflow practices. Want to know how? Read more.
Remember, Profitability Doesn’t Always Mean Good Cash Flow
The rule of accounting says that profit is simply revenue minus expenses. But, smart business owners need to know what is happening to their cash every month along with focusing on profit prospects. Along with having a deeper study of their profit and loss statement, smart business owners and accountants also need to consider other financial factors like inventory, accounts receivable, accounts payable, taxation and capital expenditures. When you get a grip on all these financial factors, you can enjoy a good cash flow status.
Forecasting the Cash Flow is Deeply Important
Even if your business is profitable, you can quickly run out of finances without liquid cash. For this, cash flow projection becomes extremely important. Cash flow forecast can help corporate leaders understand the future cash situation. This can help them tackle outgoing cash and forecast expenses for the coming months. This way, they can spot any chances of cash setback in the future and fix them before it’s too late.
Find Out Your Breakeven Point
As a growing business, it’s important to know when you are likely to reach the breakeven point. With breakeven analysis and payment cashflow projection, you can have an idea what to sell monthly and quarterly to reach the breakeven point. Breakeven analysis is based on fixed costs and variable costs per unit of sales and provides an estimate of overall revenue. When you manage your payment cashflow with a projection of when you will be realizing your first business profit, you can take realistic steps towards delaying the cash outflow for a given period.
If you run a seasonal business, things like inventory purchases and staffing costs can consume a lot of your outgoing costs even before you sell anything. So, you need to analyse trends closely to identify the highs and lows of demand. Accordingly, you can make your inventory purchases and hire adequate staff. By keeping an eye on demand trends, you can survive business seasonality without any payment cashflow setback.
Learn Accuracy in Invoicing and Collections
According to a report, 64% of the 850 small businesses surveyed in a year went unpaid for at least 60 days, and most of their clients were big companies. The longer wait for invoices being paid often takes a toll on the regular payment cashflow of SMBs.
You need to take concrete steps towards overcoming the burden of delayed invoices by setting up invoice reminders. Also, try maintaining strong invoicing collection service by chasing for payments as soon as the sale happens.
Liquidate Cash Tied Up with Assets
Do you have any inventory which is lying unused for a long time? If yes, why not sell them for cash! Non-working equipment that is just tying up your capital, and needs to be liquidated. Equipment that is lying in your office for a long time are likely to have the book value equal to the salvage value or below. This can result in a taxable gain out of worthless and obsolete inventory.
Plan for the Unexpected
At the end, plan for the unexpected. Emergencies such as the exit of your high-performing employees and illness come uninvited. You need to plan for these eventualities by creating a succession plan ready, such as business insurance. Further, cross-training can help you create a buffer for key sales professionals and other employees.