Cash flow is the cash that comes in and out of a business. It is the income generation and the payment of expenses. Cash inflows result from either the generation of sales through the selling of products and services, money borrowed, or money earned through investments.
In case more cash is getting into the business than leaving the company, you are experiencing positive cash flow. However, if more cash is leaving the business than coming into the business, you then are experiencing negative cash flow. Remember that just due to the fact that you are experiencing negative cash flow for the moment doesn’t imply that you’re going to suffer a loss, because cash flow is dynamic. Cash flow is mentioned on the business’ cash flow statement, which is also referred to as a statement of cash receipts and repayments.
Why Cash Flow Is Important?
- It gives liquidity. In case I sell something on credit to you I’ve made a profit; however until you pay me I have no cash. If in the interim I want to pay my suppliers I will have a negative cash flow.
- Being paid on time means that I can pay my suppliers quickly. Being put on stop can cause major problems to a client who needs the job done.
- It will allow the business to fulfil its tax liabilities on time.
- It will minimize costs, for instance interest rates.
- Having a positive cash flow gives a feel-good factor; it keeps you in control and makes it possible to plan therefore avoiding rushed decisions.
- In the long run a positive cash-flow outcomes in a good reputation for the business.
Tips to Improve Cash Flow
Here are some of the ways you can improve your cash flow;
Consider Potential Requirements
There is nothing more complicated or intimidating than finding cash when you’re in need. To start, maintain records of your business financials. Apart from the balance sheet, use your previous cash flow and monthly income statements in order to estimate the accessible cash and forecast possible outcomes for the next 3-6 months. These statements can help alert you in advance of any deficits, offering you time to get ready for them.
Some business owners, anticipating a future need, form a rapport with a bank for general business accounts and frequently supply the bank with working statements in an effort to build trust. Depending on the authority of the bank officer; however, these efforts are not always a hit. To improve your odds, inform your banker that you are going to search for a loan, making it clear that the objective of the rapport is to have easy access to financing if required.
Connect with Lenders
The chances of being able to borrow cash or attract investors to place more cash in your business when you need it are low. Bankers are least interested in lending to a business in desperate straits since their first objective is to be paid back. Build networks in the financial community before you need its help, not when you need it, and you may be able to secure a commitment of future funding. Bankers typically make secured loans on such assets as the following:
Accounts Receivable Financing
Normally established as a revolving line of credit depending on almost 60-80% of general accounts receivable due within a 60-90 day term, accounts receivable financing is one of the most common business loans. The balance due moves up and down as AR varies: when sales and accounts receivables increase, the bank provides more cash on the way, when sales and accounts receivables decrease, you’re expected to make a payment to bring the loan in step with the negotiated loan to accounts receivable ratio.
Lenders typically like inventory as it is expected to be sold and turned into cash. Banks normally favor done or raw inventory as it is most coveted when default. Similar to accounts receivable funding, an inventory loan moves up and down as inventory levels change. An average ratio of loan to inventory is 50%.
While technically not a short-term loan, possessed equipment in good condition can secure a set-term loan for a single shot of cash in an emergency. Keep in mind, however, that the more specialized the equipment, the lower loan-to-value ratio you can acquire.
Some business owners sell their accounts receivable to third party instead of borrow on them. Unique terms are negotiated between the third party, or “factor,” and the business, including the ratio of value paid for each invoice, whether the sale is “recourse” or “non-recourse,” and any costs which might be paid to maintain the connection among business and factor. The benefit for a company, in particular if it is newly established or has damaged credit, is that the factor looks first to the customer’s creditworthiness who owes the money, instead of the company that sells the account receivables.
Keep Your Cash Working
Keep your cash balances in interest-earning accounts that are available at most banks. In some instances, you might experience a minimal balance requirement. However, considering interest rates on these accounts are frequently lower than the savings accounts. Stay away from long-term deposit certificates, which can limit you in a specific time frame, because redeeming them early will cost you interest.