Cash flow is important for a small business since it depicts the payments made and received by a business. Cash flow implies the company’s ability to create value and generate profits. In this blog, we shall discuss cash flow in depth and how a small business can improve it.
What is Cash Flow?
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A cash flow is the net worth of cash transferred out of and into the business. Vaguely, cash flow is incoming and outgoing of cash in the business. It represents the amount of liquid cash available for a business to fund its everyday expenses.
Cash comes in the business through the clients and customers who buy the products or avail services. It is called accounts receivable. Whereas a business spends on expenses, like utility bills, salaries and wages, monthly business loan payment, etc. It is called accounts payable.
The balance with which a business starts operating for a day/month/year is called opening balance. And the balance with which it ends the day/month/year is called closing balance. If the closing balance is more than the opening balance, it is called positive flow and otherwise negative cash flow. Notably, the closing balance of the day/month/year becomes the opening balance of the next day/month/year.
What is meant by Cash Flow Statement?
A cash flow statement is also known as a statement of cash flows. A cash flow statement is a statement of cash that shows the inward and outward changes in the balance sheet. It breaks down the analysis of financing, operating, and investing activities. Essentially, this statement captures the flow of cash in and out and show its result on the balance sheet.
A cash flow statement is an important tool to determine the short-term viability of the company.
Said that, managing positive cash flow statement is one among the other difficult challenges for a business. It is important for a business to be cash rich even if it is not having much idle cash. Inaccurate management of cash flow can lead to unforeseen expenses. A cash flow can affect the liquidity of a business and no business would love to go to low liquidity situation. Since lower the liquidity, higher the chances are for the business to suffer financial liquidity.
So, a high liquidity and healthy cash flow will help the businessmen manage the business efficiently. Let’s take a look at 6 ways by which you can maintain a healthy cash flow for your small business.
Well, this point may seem vague but not all the businessmen maintain accurate accounts. It is important to have the correct set of numbers and data. In addition to maintaining accounts and keeping good accounting practices, it is also important to update them timely and in not so long period phases.
KYC – Know Your Customer
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Know Your Customer – these three words would definitely help in maintaining a positive cash flow. In other words, it is important for you as a businessman to do a check on the people before getting into business with them. You can keep a check on their credit and payment practices. In case your customers are good buyers but bad payers, it is time for you to think about whether to continue business with them or not.
A good and healthy relationship with suppliers helps in maintaining positive cash flow. Building a good relationship with a supplier might take some time. But it will definitely be very helpful when you will require inventory in advance. In addition, a good relationship will also help you buy goods and inventory on good rates and get the option of making payments later in the future.
Inventory and cash exist together – they go hand in hand. It takes skills to decide how much inventory and idle cash to keep. Each and every product present in your warehouse represents the liquid cash you otherwise would have. So, you can invest in inventory during the time sales are high. This will help you manage inventory and liquid cash in the best possible way.
It is important that you purchase only the things that you require and outsource the others. Many small businesses these days opt for a hire purchase plan (buying things on installment). You can use this method for most of your activities, ranging from cars, light commercial and heavy goods vehicles to plant and machinery and office furniture. You must also ensure that you hire purchasing things at the best value in the market.
If you announce that your customers would get discounts and other incentives if they make payments on time, then you will surely receive payments on time. You can offer discounts of up to 1-2% on the amount due if they make payments within a few days (specified by you).
A positive cash flow is not away from you with just a few changes. Cash flow management is an important aspect for business, not just to have liquidity but also for the survival of the small business. A good cash flow management will streamline your small business and allow you to concentrate on your core business without worrying about liquidity and cash.
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