If cash if King, what can be done to improve it!
Cash is king, it is one of the crucial elements not only in business but everyone’s’ personal life as well. Thus, it becomes very important to know what it is, what are its components, identifying major challenges to it and how to maintain a healthy cash balance or cash flow.
I read an article today by Liz Rosling, she mentioned that 1 in 7 small business owners have been unable to pay employees because of cashflow issues, 38% of small business owners who have suffered cashflow problems have been unable to pay debts.
Another article by Michael Flint mentioned, “Cash flow: is the reason 82% of small businesses fail.”
Also, what is cash flow, cash flow forecast and how to calculate cash flow are one of highest search relating to cash flow queries on Google.
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So, let’s try and understand in simple way, what is a cash flow.
It is simple the inflow and outflow of cash in business, or in and out of money from business through operations.
Cash inflow could be from sales and other incomes, and from capital investments like sale of assets, equity like shares.
Cash outflow is cash payments for costs of goods sold, other direct and indirect operational costs, or capital expenditure like purchase or acquisition of a property, plant or equipment or purchase of equity like shares etc.
A healthy cash flow would be a positive cash balance, thus, inflow always being higher than the outflow, which is the most difficult task for some of the business owners due to poor business practices.
So, what are some challenges facing cashflow.
1. Credit sales- However we all know its hard not to sell on credit specially to regular customers, this is one of the major cause of cash crunch as the debtors’ collection period is higher than 60 days.
2. Employee engagement- Some business owners also face high employee turnover due to lack on timely payroll payments as resulting in lower employee engagement rate which does affect their profitability as well.
3. Purchase payments- However some businesses do manage to create a receipts and payments ratio on which they pay their suppliers once they receive money from their customers. However, there are some payments like monthly debt payments, import payments etc. that does need to be paid in full on time which crunches cash flow to higher level.
4. Lack of budgeting or forecasting- I cannot stress enough how important is it to prepare monthly budgets and do at least quarterly forecasting, however not many businesses do that as they think its insignificant. Proper budgeting gives a guideline of actions to perform and forecasting can prepare you for future emergencies thus maintaining a healthy cashflow.
How can we improve our cashflow?
It is not hard at all to manage cash flow once you understand what it is and what are the problems facing it. One can manage it by:-
1. Manage your expenditure with proper budgeting- Create a monthly budget on the basis of your business nature and operations, and abide by it, Budgets would become your benchmark for spending and any variations from them would give you a proper insight to better manage your operational costs.
2. Improve your debtor’s collections ratio- However one cannot afford to spoil their relations with regular and long-term customers, however they can definitely trey and explain them the problems faced due to cash collections and reduce the amount of time involved in payments. An ideal debt collection period is 60 days, they and practice that.
3. Proper forecasting- when it comes to cash flow, forecasts are no less important. Small businesses want to grow, and want to grow as quickly as possible, and a detailed forecast can make sure you can accomplish that growth in a sustainable and efficient way. Cash flow is about planning, analyzing, and awareness. Creating a detailed forecast and using that information to drive a budget for your company is one of the most impactful steps your company can take toward intelligent cash flow management.