What is cash flow?
The total amount of money being transferred into and out of a business, especially as affecting liquidity.
For example: Think of it this way: Your cash flow represents
all the transactions you make. When you have more than enough money in your account to cover your bills, you have a positive cash flow. But when the cash flowing out of your business (i.e. expenses) exceeds the cash coming into your business (i.e. revenues and income), that’s when you have cash flow issues.
For every business is important to have a healthy inflow and outflow of cash.
Let’s Understand why it is so important to manage your cash flow
Cash flow management plays a crucial role in business Performance. As many of us heard that cash flow is the lifeblood of the business we can say that a positive cash flow can furnish your business but being unable to maintain the balance can make things go downtown. it's easy to pay your expenses when you have money set aside but when you only have limited resources, You can stumble into cash flow issues.
When you are in the early stage of business, you invest your money to set up a plant, pay rent and buy some kind of machinery or equipment, That’s why you shouldn’t be alarmed if more money leaves than it come at the initial stages of their business.
“Cash flow problems might be good news because as a business is growing is often when you start to have those cash flow problems,"
said Facebook's Sheryl Sandberg in an interview with Inc.But if you’re unable to handle these cash flow problems then you might see the cash go from little to no.
1. Good analysis of your spending: as the profit and loss are just Give you a projection of only your expenses and income, cash flow statements provide you a better direction of where your money is going. It can be a great guide for your budgeting plan when you are aware of your expense.
2. Maintaining a healthy relationship with your Vendors: As of late payment of our client is not like by our self in the same manner of our vendor also expect the timely payment. Late payments can not only lead to surcharges and interest, but they can also sour your business relationships. Effective cash flow management makes your business pay timely to your Venders.
3. Chart a path to sustainable growth: In the initial stages, you may feel that the sales are growing and profits are also increasing so why do you need financial management? cash flows management prepare for you the situation when sales may not be constant and profits may not be achieving targets. it helps you to plan finance accordingly for sustainable growth.
4. Scale up your business with a good financial plan: when you have consistency in your financial decisions, it’s easier for you to go through the transition of scaling up your business
5. Unstable revenue: Early-stage of the business when customers are unaware of the products that the company has been selling so there has been very unstable demand. Thus the amount of inventory that one has to keep to maintain the level of sales is higher than optimum and this position depends upon the company’s cash flow. So entrepreneur has to ensure there is a constant inflow of revenue to have a healthy cash flow.
Best practices for cash flow management:
● Know-How Much You Need to Break Even: It’s important for the Started to know their breakeven point to have better cash flow but it doesn’t guarantee as well cash flow. For example: when you know you’re breakeven point, If the green is going above the breakeven point then it’s all good and if it’s going below it then you have to look into it and be smarter about the way you spend your capital along the way.
● Having emergency cash reserves allows some flexibility and security during economic downturns. Provision reserve is very important as well as a requirement of the business. As we know start-ups work in a very dynamic environment and the revenue is also not stable and it become very essential for them to keep some money aside for the unpredictable situation and they need to be prepared accordingly.
INVOICE
● Set Invoice Timelines and Terms: Important for the business to send invoices at the right time, sometimes invoice isn’t been given any kind of importance but when the invoice is sent out late, reach the clients late and thus lead to late payment. So every business needs to make the invoicing process seriously.
DIGITAL & FAST OPTION
● Encourage Easy, Early Payments: Online payment platforms should be given Preference as they are simplified and fast from both perspectives.
● Put Cash Flow over Profit: Sometimes to encourage paid subscriptions, free trials are considered to be a very effective strategy but sometimes it backfires to entrepreneurs. When they fall into a trap Because too many people take interest in free trials, which results in a cash crunch for business.
● Assign Someone to Monitor Your Cash Flow: an entrepreneur in an Early startup has to be a multitasker but constantly monitoring your cash flow might be a really difficult task so maybe hiring a professional or outsourcing financial management can be a great practice to manage your cash flow.
● Setting the Spending Priorities Right: Initial stages of their card and your bank account its important to develop a healthy habit by defining a set of rules and deciding who gets to use the privileges. Measures like having a primary administrator, requiring dual authorization for certain expenses, and having separate accounts for payables and receivables can help prevent fraud. Without such discipline, accounting and tax preparation will turn into a headache. You don’t want to be in a position of figuring out who spent what and whether a purchase was a business expense or not.
● Use Accounting or Bookkeeping Tools: a good way of managing your cash flow by Keeping your books organized to get the sense of
whether your company is hitting its financial plan. Do Not consider bookkeeping for only keeping the chaos at the bay. Messy books will not reflect well on your business savvy when potential investors begin to do due diligence on your startup.
USE BOOKKEEPING TOOLS
To conclude
Ensure you’re focused on the needs of your customer and building that steady pipeline of sales, income, and cash – and don’t be tempted by the allure of investor’s money until you’re 100% confident in the day-to-day financial stability and cash flow prospects of your start-up.
The present business environment offers fertile ground for start-up ideas, but success in the venture depends on how operations are run, and not just innovative concepts. Sound financial practices will support the growth of a start-up into getting an edge in the competitive market.
You do not have to be a financial genius to manage cash flow. You do, however, have to be steady and regular in that management, so that you know exactly where you are at any given moment and what you may have to modify if shortfalls occur. Stay connected for more such learning, we will be updating.
Read more on the use of Cash Flow in Financial Modeling here: Financial Modeling: Ultimate Guide
Perfectly explained 👍