The popular saying goes Cash is the King, and they are not wrong per se. Cash flow is an important aspect of the financial management of every business. Whether the business is growing or struggling, managing its cash flow is essential, and often, the survival of the business depends on it.
What is Cash Flow and Why is it Important?
Cash inflow is the lifeline of any business, and its primary sources are payments from customers, receipt of a loan, and returns on investments. A steady inward flow of cash is important as this is later required for payment of employees, buying supplies, paying rents and utilities, etc.
In general, businesses track cash flow either weekly, monthly, or quarterly. There are mostly two kinds of cash flows:
Positive cash flow: When the cash entering the business is more than the amount of cash leaving the business, then the cash flow is said to be positive. It is the sign of a flourishing and profitable business.
Negative cash flow: This occurs when your outflow of cash is greater than your incoming cash, and this is generally not a good sign for your business. A number of reasons can cause a negative cash flow like a fall in sales, seasonality, unforeseen expenses, or delayed payments from clients.
Ways to Maintain A Steady Cash Flow
If you’re having trouble managing your cash flow, or if you’d just like to try and figure out how to improve it, consider these tips for better cash flow.
1. Keep track of the cash flow
Analysing the exact sources of your income and expenditure and studying their trends can help you predict and plan for the future. It is always advised to prepare a detailed cash flow statement.
2. Speed up recovery of your dues
The trick is to bill quickly to collect quickly. To stay away from late payments, bill as early as possible and make those invoices as clear and as detailed as possible. Also, try to find out the favourable mode of payment for your clients or customers and allow them to use those methods.
3. Short-term financing
Short-term financing is a viable option. You can opt for a business line of credit to make emergency purchases or to bridge the gap between payables and receivables. Business credit cards are also issued by many banks which you can use to pay your vendors.
4. Long-term financing
It is always advised to finance large asset purchases such as equipment and real estate with long-term loans instead of with your working capital. This gives you the opportunity to spread the payments over the average life of the assets. Of course, you’ll be paying interest, but you’ll have preserved your working capital for business operations as well.
5. Have a financial backup
The final strategy to stay ahead of cash flow problems is to have a safe financial cushion. This is not always easy for small businesses, especially the ones already struggling with cash flow. So, it is important to always set aside some funds for unforeseen situations when the cash flow is unsteady or negative.
In case you are struggling with steadying your cash flow, you may consider taking a short-term loan for your business. For expert guidance, an easy application process, and quick loan disbursal, contact Gromor Finance today!