Why Cash flow Management is key for any Business

on June 1, 2020

What is cashflow management?

Cash flow management is the process of tracking how much money is coming into and going out of your business. This helps you predict how much money will be available to your business in the future. It also helps you identify how much money your business needs to cover debts, like paying staff and suppliers. Companies that have been working and budgeting on cashflow management have been great benefits during the recent Covid-19 outbreak. While Profit is a key component establishing the profitability of the business its not necessarily cashflow positive.

Why is cash flow important?

Lack of cash is one of the biggest reasons small businesses fail.

The Small Business Administration says that “inadequate cash reserves” are a top reason start-up fail. It is called “running out of money,” and it will shut you down faster than anything else. he first six months of a business is a crucial time for cash flow. If you do not have enough cash to carry you through this time, your chances for success are not good. Suppliers often will not give credit to new businesses, and your customers may want to pay on credit, giving you a “cash crunch” to deal with.

How to Monitor your cashflow?

Cashflow is monitored by preparing a cashflow statement. This shows the real term cash inflows and outflows of a business during a period. This is different to profit & loss account and evaluates cash movements only.  Most accounting software’s can generate a cashflow statement as part of the management reports.

Here are some handy tips to start working on your cashflow

  • Follow up outstanding payments – do not be afraid to be firm but fair. We are all in the same situation
  • Continue to send your invoices promptly, and also paid promptly – talk to your customers and emphasis how important it is that you are paid on time; if your invoices are automated add a personal message to let them know you are reachable and working from home
  • Consider offering prompt payment incentives or creative ways of using shared services.
  • Consider shortening payment terms in general based on your client and his financial circumstances. If invoices are paid 14 days late, so shortening payment terms to 7 days can help.
  • Consider new payment methods, eg online payment services (Stripe, GoCardless) or accepting card payments. It is a really good time to put all the free time to automate your systems
  • Are there options for diversifying, ie online services, offering vouchers etc?
  • Control inventory. Having too much inventory ties up cash. Keep track of inventory so you can estimate your needs better.
  • Try working out customer profitability or project profitability statements. You will be surprised to see how some clients exhaust more resources and not profitable. Explain to our customers your position by being honest and end unprofitable relationships.
  • Look at opportunities to lease equipment/assets instead of buying them.

At outsourced ACC we ensure our clients have access to cashflow information needed to make quick decisions. We work with all major accounting software providers to ensure we provide you with the best solution that fits you. Get in touch with our team today to find out more.

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