Cash Flow is one of the most crucial parts of a business, which can lead to disastrous results if not taken care of. It indicates how much cash is going out and how much revenue is generated by the company. The details of cash flow can be caused by preparing a cash flow account, which provides all the necessary information about the company's cash transactions. This article would give you a brief understanding of the cash flow statement and enumerate the various ways by which you can improve the cash flow of a company.
First, let us understand the meaning and importance of Cash Flow in a business.
What is a Cash Flow Statement?
A Cash Flow Statement is a tool that helps understand the operating, investing and financing activities of the Business. It is the third most crucial business report after the balance sheet and the profit and loss account. This report helps you to understand the financial position of the Business and also details of the flow of cash and credit in the Business. This will help the management in planning for the future of the Business.
Cash flow analysis is very important for a business as the lack of cash forms one of the primary cause for the failure of companies. Thus, a business entity must continuously strive the enhancing its cash flow. The next ten steps will provide you with the knowledge as to how you can do that:
Ten Ways to Improve Cash Flow
Here are ten tips that will help you in the betterment of the cash flow of your Business:
- Thorough Background Checks
Checking a customer's credit history in advance is really important, especially when the customer doesn’t want to pay you in cash. If after the credit check you find out that the customer has poor credit, the chances are that he won’t be making the payments on time. One way to check the credit history of a person is by buying the status report from a credit agency. It contains the full description and all the person's financial data, along with a recommended credit rating.
- Expansion and Diversification
The cash flow can be helped by providing a varied variety of products and services. This would lead to some extra sales and also attract new customers. You can also expand your market, which would increase your customer base and eventually help in the inflow of cash. The only catch of this method is that it is a long term solution and will not be able to assist in filling the immediate cash-flow gap.
- Reassess the Expenses
Improving a cash flow doesn’t only include increasing the inflow of cash to the Business. It also means reducing the outflow of money from the Business. This can be done by restructuring all the activities of the Business and removing unnecessary processes. This will save both money and time for the Business. We also need to focus on increasing the speed and efficiency of the company.
- Liquidation of Old Inventory
Many a time, old machinery and other inventories keep on accumulating in a business. These not only take extra space but also result in the blockage of funds. Selling off these additional assets would increase cash in the Business and help in savings of expenses related to storage, insurance, etc.
- Increasing the Price
This is a straightforward and easy solution to your cash flow problem. Raising the prices would increase cash inflow. The challenge here is to maintain a balance between keeping the rates of the product reasonable but at the same time, making a profit.
- An account of the Business
Opening a business saving account can be very simple and advantageous. It helps you produce extra cash by receiving a modest interest rate on the money at hand. This will give you the surety of a cash flow cushion for the Business and gives you the flexibility of withdrawing cash according to your requirement.
- Getting a Line of Credit (LoC)
A line of credit will act as a buffer that could be used in the case of emergencies or to cover short term requirements of the businesses. Now a day a line of credit can be availed at very reasonable interest rates, and you will need to pay for the interest only on the amount that is borrowed by you. It is recommended that all the businesses arrange for a credit line, just in case of emergencies.
- Steps towards Timely Payments
One of the key ways to improve your cash flow is by receiving payments from your customers on time. This can be done by reminding the customers a few days before the due date. We can also provide some incentive (monetary or service) for early payment and charge a fine for the invoices' late payment. If the aforementioned strategies do not work for you are in dire need of cash, you can consider selling your unpaid invoices in exchange for quick money (Invoice Factoring). You could draw some money against any future payment of any invoice (Invoice Financing).
- Budgeting the Cash Flow
A business continually needs to analyze its cash flow and set a budget regarding the receivables and payables. It will also tell us how long our Business can survive if the company receives no or limited funding (Also known as Burn Rate). This will help in timing the borrowing of the loans, allocating the funds to the various activities of the Business, conducting transactions with the clients etc.
- Collection Agency
If there are a massive amount of unpaid debts which are hampering your cash flow, as a last resort, the Business must look towards a third party and outsource the work to a collection agency. However, the decision of utilizing the services of a collection agency should be used only after significant consideration as the actions of the third party would greatly reflect on your company. It can significantly hamper the relationships between the company and the customers.
These are only some of the steps a business should incorporate in their workings as they would greatly help manage and increase the business's cash flow.
We at JAXA provides a wide range of assorted Cash Flow and Forecasting services which include Daily cash-flow report, Cash flow budgeting, Managing electronic payments, Financial risk management, etc. Armed with the information from these reports, your Business can plan and prepare contingencies for all the situations. In case of any questions, please contact us, we’d be glad to assist you.