Cash flow is the total amount of cash flowing in and out of the business for a period of time. Difference between the cash at the start of the accounting period and the end is the cash flow which is carefully accounted in a cash flow statement. And positive cash flow is the key for the effective financial management of a business entity.
Even a profitable business on paper can run into cash problems, stall their progress and lose out opportunities to grow and spiral into losses if the cash flow is negative and necessary step are not taken. And this why an effective cash flow analysis and management is crucial for the smooth functioning and growth of any business.
In this blog we help you know the importance of cash flow management and gives a few tips to improve cash flow for business growth:
Importance of Cash Flow Management for Small & Medium Businesses:
The two most highly important financial statements that play a crucial role in the smooth and successful running for every business are income statement and cash flow statement. While the income statement shows, business revenues, expenses, profit or loss of the overall business for a particular period, cash flow statements throws light on the cash in-flow and out-flow. The importance of effective cash flow management can be understood in the fact that even companies with top sales, good profit in the income statement can be suddenly hit by cash problems if the cash flow is not managed properly according to the requirements of the business, present and future.
Let us explain: Imagine you sold your products worth $50,000 to your customers offering them a 60 day period to pay. Now you might have ordered $25,000 worth of supplies and your vendors have offered you 30 day period to pay. On top of this you are obliged to pay expenses of $30,000 for payroll, rent, office supplies and more and now you are left with no cash in hand and in position to borrow money at a high-interest rate. All these problems can spiral down spoiling vendor relationships and losing outgrowth opportunities even when you make top sales and with one problem over other accumulating, an entity can be out of business in a matter of months. And this is why cash flow planning and cash flow forecast are critical for the smooth functioning of a business
Tips for Improved Cash Flow Analysis and Management:
A timely and effective cash flow analysis shows the financial position of the business over a specific period, helps in cash flow projections, provides insights about solvency and liquidity of the entity and uncovers cash-generating opportunities for the entity. And here are a few tips that can help you improve your cash flow and management for better business growth:
Optimize Receivables: Since the receivables are the sources of cash in-flow and optimizing the speed of turning your products into receivables and receivables into cash payments can help you improve your cash in-flow. You can accomplish this by improved invoice process, follow-ups, requesting for cash deposits at the time of order, offering discounts for early payments and requesting for pre-authorization of checks.
Manage Accounts Payables: Accounts Payables are how your cash goes out and hence it is even more important to maintain sufficient cash-in-hand. Expenses grow hand-in-hand with business growth and accountants have to keep a close eye on the timing if the payables. Stretch the timeline for payments as much as possible, make full use of the credit terms with the help of electronic fund transfers. Schedule the payments a day before the last date, the principle is to get paid early and stretch the timelines to control the cash flowing out.
Improve Your Inventory:
Inventory often goes unidentified and yet it can tie-in a lot of cash and impact your cash in-flow. While the high volume of inventory can bring you discounts, it also puts you at risk of less cash in hand for your business operations. So carefully review your inventory and identify goods that do not move at a similar pace as others. Sell them, bundle them with other products or donate them to claim tax benefits, but convert them into cash benefits for better cash flow.
Invest in Accurate and Effective Bookkeeping Services:
The most important pillar of improving cash flow is to maintaining clean accurate books that can help you dig-in all the information you need for cash flow analysis and forecasting. Invoices issued, paid, received, taxes and other expenses: tracking all the financial information is key for cash flow analysis and forecasting and it can only be performed if you can invest in efficient booking service.
Outsourced Bookkeeping is one of the best back-office accounting firms in the business offering both conventional and remote booking services for all your needs. From Bookkeeping, Accounts Payable Tax preparation to Quick Book Services, our team of accounting experts specialize in all types accounting services that help in smooth functioning and growth of your business, you can contact us here: https://outsourcedbookeeping.com/
