As a co-founder of a Fintech firm, one of the challenges that I faced during the initial years of the business, was managing its cash flow – the key to a business’s survival. It is critical to maintain a level of working capital to take care of financial crunches and daily business operations. If your business does not have enough cash flow, then it may prevent you from buying materials, paying suppliers, and your employees.
Specifically, a delay between the time you receive money from customers and time you have to pay suppliers, can cause cash flow problems. Many new and growing businesses encounter this issue, and with accurate analysis of working capital need, inventory, tracking invoices, and other methods, it is possible to stay on top of cash flow management.
One of the ways to manage cash flow is to delay cash outlays as long as possible and motivating your customers to clear the due payment as quickly as possible. So, how to manage and improve the cash flow for your business? Before I explain that, let me inform you about the basics of cash flow.
What is Cash Flow?
Cash flow is basically movement of funds in and out of a business. Positive cash flow is a scenario when the cash entering a business from accounts receivable, sales, etc is greater than cash leaving the business through employee remuneration, accounts payable, other expenses etc.
Negative cash flow occurs when cash outflow is greater than cash inflow. This is definitely not a great sign for a company. But, there are steps to fix the problem, such as curtailing unnecessary expenses, tracking cash flow regularly so as to prevent negative cash flow from affecting the business.
Both positive and negative cash flow tell you about the incoming and outgoing amount from your business. So how do you generate a steady cash flow? I will discuss this aspect in detail later in the post.
Does a Good Profit Indicate a Good Cash Flow?
I have met several people who judge a business by the profits it generates. While profit is an indicator of a company’s financial health, a good profit does not indicate a good cash flow. Let me explain why it is so. For instance, you look at your company’s profit and loss statement. All you get to know is the amount earned as profit, and the amount run in loss.
It does not necessary entail that your business has enough cash flow to keep the company going. There are several other financial factors responsible to determine cash flow, such as inventory, capital expenditures, accounts receivable and payable, taxation, etc.
Thus, an efficient cash flow management is about understanding the factors that contribute to cash flow along with profit and loss analysis, and not the percentage of profit generated alone.
Working Capital and Breakeven Analysis
Now that you understand the basics of cash flow and how profit is not the sole indicator of it, let me discuss the two other important aspects of a business:
1. Working Capital: To find out the working capital your company requires for functioning smoothly, you must know the answers to questions like:
- How much payment is expected from customers in a week?
- How much inventory is needed to sustain operations?
- How much cash is tied up in a project?
You need to measure and keep an account of all the cash needs, payments, and expenses over a period of time to zero-in on a working capital amount to save as surplus.
2. Breakeven Point: Knowing the breakeven point will tell you when the business will become profitable. This will help setting an early goal and projecting a realistic cash flow requirement. So analyze the data about expenses and income to begin with a breakeven analysis.
How to Create a Positive Cash Flow for Your Business?
To boost cash inflow as compared to outflow, here are a few tips to follow.
1. Take a Loan
You can either choose a collateral-less or collateral loan for your business.
- Unsecured Financing
To get over shortage of cash for important activities, you can consider an unsecured business loan from a bank or NBFC. The loan can be either a short-term or a long-term one. Many financial institutions offer a line of credit to make emergency purchases to bridge the gap between payables and receivables. But, if that is not what you need, then an unsecured business loan determined on the basis of your company’s financial position, can serve an instant solution for cash needs.
I have personally witnessed several start-ups dropping out of business in a few years because they did not have a convincing business plan or required financial reports to obtain funds from financial institutions. So, always have a strong business plan and financial documents with audited P&L statements, etc ready for submission to the bank/NBFC, when looking for an unsecured financing.
- Secured Financing
Secured financing is a method of obtaining funds against assets, such as real estate property, equipment, inventory, etc. Secured loans may attract a lower rate of interest than unsecured loans. The financial institution however has the right to own/liquidate the asset secured, in case you default on repayments.
2. Liquidate Assets You Do Not Need
Consider selling assets you no longer need for generating quick cash. Do you have equipment you do not use anymore? Is there any inventory turning obsolete? Non-working, idle, and outdated equipment only takes up more maintenance and space, but does not add to productivity. So, why keep holding on to it? Rather, you can sell it and earn an amount to improve cash inflow.
3. Recovery of Receivables
You should do the billing on time and more importantly, make sure collection of payments happens quickly. Bill as early as possible and make invoices detailed and clear to avoid late payments. You can also alter the billing practices and increase the frequency of invoices.
For instance, if you were generating monthly invoices for clients, switch to bi-weekly invoicing. Inform the customer about the date by which you expect the payment to be cleared, and keep follow up about the payment status with the customer after sending the invoice.
Make it easier for the client to pay you, like attach a payment link at the end of invoice, so that the client can simply click and complete the payment. Also, allow different modes of payment, such as payment through credit card, debit card, net banking, payment wallets, etc.
To Sum it Up
As a small business owner, I will say that maintaining a steady cash flow is extremely important for a company. Sufficient cash flow expands the flexibility of business without the business owner having to fret about arranging funds for even the elementary activities. This is why it is crucial to analyze the cash outflow and inflow for your company and try increase the cash inflow in every way possible.
Satchit Hasabnis a Co-Founder of Loanbaba & a highly qualified Chartered Financial Analyst who has more than 10 years of experience in the industry.