Smart financial management for small business:
Basic cash flow management

Cash flow is the life of any business, and the business that manages to retain a positive cash flow is the one that will survive and thrive in the long run. Many businesses believe that being profitable is the primary criteria, but a business can be profitable and yet fail to succeed if it cannot manage its cash flows correctly. For example, a company’s assets may all be in the form of inventory or receivables and therefore may not be in a position to pay its creditors or employees, creating a cash flow problem for the management. Therefore it is critical to ensure the availability of the right amount of cash at the right time for use, in order to keep the business going.

In order to maintain a good cash flow, some of the most important points that any business owner needs to keep in mind are listed here.

Determine Your Break-Even Point

Every business has certain fixed and variable costs. You have a fairly good idea of the fixed costs, and you need to keep a good understanding of the variable costs in order to understand at what point your business will break even. A good measurement of your inflows and outflows of cash are essential for this purpose.

Anticipate Cash Flow needs in advance

Trying to arrange a business loan when you’re desperately in need of cash can be difficult. It is easier to track your projected finances based on payments due from customers and projected outgo over a period of 30-90 days, and prepare for the same in advance.

Get Credit Loan Approvals in Advance

Lenders do not like to lend to a business in distress. It is always better to get a business loan approval in advance when your business does not really require it, and have the loan disbursal made when you require the funds. A line of pre-approved credit is always a good idea to counter any unexpected cash flow disruptions.

When Taking Credit, Keep Credit periods long

Try and get credit period on business purchases longer than the credit period that you give your customers. This will result in the minimum investment of your working capital, as your customers will pay you before your own bills to your suppliers are due.

When Giving Credit, Keep Credit periods short and amounts low

Long credit periods for high value purchases is never a good idea, as even a short delay can result in significant interest cost to you. Therefore, if credit periods are long, keep amounts outstanding low. Alternatively, asking for an advance or security deposit is normal if the size of the order is very large. If the period of delivery is long, setting milestone based payment schedules also works to your benefit.

Track Payments Diligently

Keep a close watch on the outstanding payments. Generate your invoices on time, so that payments are received within the stipulated credit period. It can also be a good idea to hire someone to keep track and collect payments on time if yours is a credit-heavy business. The salary of the person is likely to be far lower than the interest you pay on the outstanding dues.

Encourage customers to pay up faster

Bill discounting for cash or quick payments is always a good policy, as it helps you keep the receipts outstanding, and therefore interest payments on working capital low.

Managing cash flow should be the number one priority of the business, and these will go a long way towards mitigating the risk on that front. Additionally, a number of credit solutions are today available for businesses looking to overcome a temporary cash flow situation, and knowing about these will help you as a business owner manage your business better.