Owning a business isn’t as fancy as it looks from the outside! It comes with countless responsibilities sprawling each and every edge of your business. Be it your office with your loaded task force, paying supplies and salaries, arranging for raw material supply or even you keeping a close watch on online web pages and targeted clients. With so many errands in progress, the ultimate goal of a business is to convert cash inflow to profit.
Something that we often as business owners fail to notice is that profit dwells where there is an organised check on cash flow. Needless to say, profit is attainable only via effective handling of the working capital entering the business.
Why is Monitoring Cash Flow Important?
Cash flow can be divided into 2 types: Positive cash flow and Negative cash flow.
Positive Cash Flow
Positive cash flow, as the name suggests is a favorable cash flow index where the incoming cash is greater than the amount of cash exiting in the business. Incoming cash flow is from sales completed, accounts, loans, and invoice financing. This allows for profit to rise up in the business.
Negative Cash Flow
This is a heads up for a potential loss that you will have to incur over time. Cash leaving the organisation is in this case greater than incoming capital and can cause great risks to your marketing front. It is crucial that we mitigate this by cutting down business expenses and streamline cash flow with a proper strategy. You need to incorporate a break even analysis to ensure this.
Break even analysis is an estimate of the time scale at which your company will be profitable based on various factors. It can be calculated by dividing the fixed cost with the revenue per unit. Further you need to deduct the variable cost per unit from this. This is also critical in analyzing how you need to implement an emergency Plan-B in case of an unprecedented financial threat. Always keep a close contact with your accountant to root out such incidents and plan ahead.
|Incoming Cash Flow||Outgoing Cash Flow|
|Bills-Rent, phone bills, Travel, WIFI, electricity bills.|
Indicators to Estimate Cash Flow
Key Performance Indicators (KPI) are prime factors that weigh the state of your business and cash flow.
Customer Acquisition Cost
The primary factor for strong management of your cash flow index is the cost of customer acquisition. The finance you keep aside to pull in your targeted customers could cause your outgoing cash to soar if not supervised properly. Many companies have lost most of their incoming cash by spending hefty amounts of money on advertising and marketing tactics. This could drain your capital over time without your notice.
Most businesses track their cash flow on a weekly, monthly, or quarterly basis. Maintaining a database to keep finances under check will enable you to reflect on past profits and risks encountered, so that avoids mishaps in the future.
Sometimes the trivial frequent bills you pay can soak up your profits without a trace. You can only trace such loopholes if you enter it in your inventory. Bills like daily coffee or snack bills for employees, recreational bills like office meetings, parties, and trip bills you incur frequently and even the phone/wifi bills will drip from your profit slowly but drastically. You can’t manage what you can’t measure.
Maintaining a good rapport with regular customers can help you earn lot more new customers over time. When you convince them, they convince others. You can collect testimonials from satisfied customers and feed backs so that you can improve products or services that don’t sell well in your business.
Finding a Solution to Cash Flow Problems
There are numerous ways to mitigate cash flow issues with the help of banks and proper cash flow strategies. Anything as small as an excel sheet that is systematically maintained, comes a long way in analyzing possible risks and evaluate the pace of your business.
If you want a long-term loan, you can apply for it with minimal interest. There are various online portals that offer business loans that offer quick processing of loans with no need for collateral, flexible repayments, and extended loan tenure.
You have an array of other loan options too which include equity funding, equipment finances, invoice financing, and supplier credit.
Separate Business Account for the Company
Keeping a dedicated account for your business helps you keep track of all the cash inflow and outflow. It is recommended that you purchase a credit card for that account so you can make business-related payments through that account. Segregating this from your personal account will act as an automatic reminder in case you are on the edge of exhausting your business funds and also preventing you from filling in the gaps with money from your personal account.
Sell off Obsolete Equipment
Make sure that you don’t keep equipment you no longer need in your office. They just take up most of the space and have no use at all. Sell them off so you can use money to run other errands in your office. It is an easy way to make quick cash too in case of a small financial crunch. Also reconsider when you purchase new inventory in the future and analyse whether you need it or want it. If it is a necessity, go ahead.
To save your company from a huge financial crunch in unprecedented cases, it is advised that you save up money worth at least 3-6 months worth your expenses to cover up the break even point. If you do not come with strategies to handle this cash flow mechanism, it can jeopardize your company.
Remember, the profit is not the ultimatum. It is the resiliency you obtain by managing your cash flow and consequent progress you make, that helps you stand the test of time!