Cash flow is the total flow of cash or cash equivalents into or out of any business. Cash from any financial, operational, or investment is termed as inflow, while any payment made or expenditure is termed as outflow. A company is of high value when it is generating positive cash flow or, more specifically, maximising long-term free cash flow (FCF). Free cash flow (FCF) is the cash that a company generates from conducting normal business operations over and above any money spent on capital expenditure (CapEx).
Cash flow is an important parameter to analyse how profitable and stable a company’s financials are to sustain future needs. It also shows a company’s robustness to endure any financial difficulty during rough times. Thus, the owner of a company must know how to manage cash flow efficiently.
Categories of cash flow
- Cash Flow from Operations (CFO):- Operating Cash Flow, or CFO, refers to the flow of money from the production and sale of goods from regular operations. CFO indicates whether or not a company has enough funds coming in to pay its bills or to manage operating expenses.
- Cash Flow from Investing (CFI):- CFI, or investing cash flow, reports how much cash flow in business has been generated or spent from various investment-related activities in a specific period. These include the purchase of speculative assets, investment in securities, or the sale of securities or assets.
- Cash Flow from financing (CFF):- CFF, or financing cash flow, shows the net flow of cash that is used to fund the company and its capital. These include transactions involving issuing debt, equity, and paying dividends.
From all this, we can learn what cash flow is and the importance of a positive cash flow. Yet, in a real-world scenario, it is not as easy as it seems to manage and to keep a record of cash flow in a business. So, here are some experts tips on how to manage the cash flow for a business -
1. Maintain Cash reserve
In any new business/startup, there will be a time when you will fall short. It happens with every business, even ones with robust plans and backup. To manage that period with minimum inconvenience possible, keep a good cash reserve.
2. Keep track of your funds
There will be a lot of transactions of cash inflow and outflow, that too from different sources. It could become hectic if you do all this accounting work all by yourself. Instead, hire an accountant or CFO to maintain such records and review them daily. Analyse where you can save some money or how you can manage cash flow in business more efficiently.
In case, you can’t hire an accountant or find someone who could do such work, online bahi khata apps like OkCredit provide you with a good platform to manage and keep a record of all your transactions in one place and review it anytime.
3. Track and analyse everything
To improve your cash flow in a business, the first thing you are required to do is to analyse where your money is going and how long it takes your company to receive payments from others. You must also analyse where you can reduce your expenditure. Figure out if your investments are giving you enough returns or whether you could get better returns by investing somewhere else. Analyse if any machinery or tool is insufficient or could be replaced by machinery with better performance and efficiency.
4. Analyse your risk-taking capacity
You might often find some investment opportunities where you could get a high return but it will also have high risk. Make sure you are completely aware of such circumstances and only invest if you believe you could survive even if things go wrong.
5. Have a plan to tackle if cash flow drops
In the early stage of any business, cash flow in a business can fluctuate a lot due to many reasons. One should have a plan to deal with such situations and have a safety net of cash for such instances.
6. Extend payment deadlines where you can
For any business, it is best if they can get payments as soon as possible. On the other hand, it would be convenient if their payment deadlines could be extended. It will give you a comfortable time to make payment. If the payment deadline is 30 days, pay it at least after 15 days and invest this cash during this period to gain money on the same.
7. Know your break-even point
The future of a business depends mainly upon one key factor which is profitability. A business can only sustain itself in the long term if it is a profitable business. As the owner, you should know when your business will start generating profits. This will give you a set goal to strive for and a target needed for projecting future cash flow.
8. Arrange a line of credit at your bank
It is very likely that at some point you will fall short of paying bills in the future. This happens with every startup, it doesn't mean that your business has failed. However, it will be better if you prepare for such instances before they happen. If you go to any bank for money when you need to pay urgently, the banker might not be interested in giving you money at that point. Instead, arrange a line of credit before it is vital.
9. Prepare for the unexpected
One thing the COVID-19 Pandemic has made businesses realise is the importance of preparing for the unexpected. One just doesn't know what might happen tomorrow and you might need to change your whole way of doing business or your business might even be completely shut for a short period. This makes it necessary to safeguard one’s business from any such unexpected situations.
10. Seek expert advice
It is quite obvious that you might not be aware of all options which could help your business financially. Maybe by reducing expenditure, investing in better resources or by making use of any government policy, you could help your business grow. It is better to reach out to experts like OkCredit who have much better knowledge and experience of all the options that you might not even know of which could benefit your business.
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3) Tips for Businesses to Overcome the Covid Blues - Revival Tips for Businesses
4) What are the keys to success when operating a small scale business?
5) OkCredit: All you need to know about OkCredit & how it works.
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Q. What are a few early red flags for Cash Flow?
Ans. A few early red flags for Cash Flow are:
- Relying on a few big customers for your expenses in the future. This might cause a problem if that customer decides to leave due to any reason.
- Inventory turnover days are increasing and sales are going down.
- Increase in debtor days. Debtor day is the ratio that measures how quickly cash is being collected from debtors.
- Having a lot of short-term debt.
- Too many receivables pending and not being able to make payments due to delay in receivables.
Q. What is the difference between cash flow and net income?
Ans. Cash flow is determined by changes in the cash balance from one accounting period to the next. Net income is gross income minus expenses in an accounting period.
Q. Can a cash flow be negative?
Ans. Yes, a company might report negative cash flow for an accounting period. It happens when the company is spending more than it is earning. Temporary negative cash flow does not mean the company has failed but rather repeated negative cash flow can be a cause of trouble for the company.
Q. What happens if a company's cash flow is negative?
Ans. This will happen if the company is not earning much or not making a profit and the spending of the company is still the same or has increased. This will lead to the company not being able to pay bills, which if continued would result in the company going bankrupt.
Q. Does negative or less cash flow always means the company is not stable?
Ans. No, it might be the case that the company is spending a lot on R&D (Research and Development) or advertisement in an accounting period which will ultimately lead to new or better products for the company and an increase in sales.
Q. How do I analyse cash flow?
Ans. First, you would require a cash flow statement that will track where your company is spending and earning its money. This analysis would include operating expenses, investments, financing costs, etc.