Cash flow is a very important term to understand. It basically means the money coming in and out of your business. Your overall goal should be to maintain a cashflow positive state, but what does that mean and how can you achieve it?
What Is Cashflow?
Cashflow is simply a term to describe the movement of money within your business. This movement occurs in two directions. Money goes out, and money (hopefully!) comes in.
Cash received usually comes in the form of payments from clients or customers for your products or services. In some cases, you might get your payments at the time of sale, as in a physical shop. Often, B2B operations end up with accounts receivable, money owed by clients that they will receive on a certain date.
Cash going out comes in the form of all expenses, such as rent or mortgage payments, website costs, wages, taxes, product orders, and other overheads.
It’s important to understand that cash flow is different from profit. You could show profits for a certain quarter, or for the fiscal year, but still, have periods of negative cash flow when you have more money going out than coming in.
The Tipping Point
Positive cash flow is one of the main goals of any business. When you have more money going out than coming in, your business is in danger of becoming overdrawn, and over time this will cause serious financial strain. Actually, a lack of money is one of the main reasons why small businesses fail, and negative cash flow is a serious leach on funds.
The tipping point comes when your business has more money coming in than going out, known as a positive cash flow. At this stage, a business has reached a level of self-sufficiency in which it can support itself. Liquid assets can be used to settle company debts, pay shareholder dividends, reinvest and grow.
Dealing With Cashflow Crisis
If you want your business to survive and thrive, you need to overcome the initial hurdle and become cash-flow positive. Unfortunately, many businesses will have to spend at least some amount of time with negative cash flow. Start-ups must deal with overheads without necessarily having the customer base to make sales.
That’s why most new businesses need ‘working capital’. Usually, you need to be able to fund your business or gain initial investment to get your product to market and make sales. Many businesses utilize business loans or personal loans to gain working capital. Even if you have bad credit, you can still get a short-term loan from companies like Spotter Loans. Keep in mind that your loan repayments will become expenses, and so you will need to improve your earnings to keep up.
Throughout your journey towards business growth, you will need to keep cash flow in mind and work to improve it. Here are a few tips to help you out:
Maintain a financial cushion
Aim to keep a healthy business fund that can be used as a cushion in times of cash flow crisis. There are many ways to raise capital. Once established, look to improve existing income and seek alternative sources of revenue to increase your safety net.
Set Payment Terms
The lowest level of risk when it comes to payment terms is to take payment in advance, but this is not always practical. If you accept accounts receivable, then you should select trustworthy clients and set well-defined payment terms based on keeping a healthy cash flow. Be sure to follow up on payments.
Manage Expenses
You can work on reducing expenses to improve overall cash flow. A cash flow problem can be caused by overstocking your inventory or paying too much for marketing options that aren’t returning profits. Reduce overheads to get cash flow positive.
