In order to operate and be liquid as a business, you have to have healthy cash flows. To do this, you need to constantly check on your cash flow statements aside from balance sheets and income statements. Cash flow statements are documents that summarize how much cash or cash equivalents enter and leave a company or business.
While it’s inevitable for a business to experience lapses in sales and such, you still need cash to pay your suppliers and employees. If you’re having problems with the cash flow of your business, here are some tips to help you solve and get them out of the way:
1. Control Overhead Expenses
Overhead expenses are business expenses that don’t contribute directly to manufacturing the product or rendering services. Instead, these are expenses that the business incurs to keep the business going. These include rent, utilities, insurance, and payroll.
One of the ways to solve cash flow problems is to control and decrease unnecessary overhead expenses. To decrease expenses like these, you can look for business spaces with lower rental fees. On the other hand, you can also save on electricity and water to lower down utility expenses. At the same time, you can also control payroll by converting your receivables into cash, which typically advances 90% of the invoice’s value, to pay your employees. This is a very useful way to gap up on your expenses and create a steady cash flow.
2. Set Up Credit Lines
One rule of business is that not all debt is bad debt. Getting business financing for working capital and gap-up expenses can be a very good way to keep your cash flow healthy. You can approach a bank to get a credit line to keep your cash flows steady. With a credit line, you can have the bank pay for your raw materials first, then you can use those raw materials and turn them into products. When these get sold, that’s when you pay the bank. This method will help you have cash even while waiting for your goods to be sold.
3. Negotiate with Suppliers or Vendors
Another secret to healthy cash flow is developing a good working relationship with suppliers. Once you have their trust, you can set up trade credit with them. By doing this, your suppliers and vendors can extend credit terms to you. With extended credit terms, you can repay them after a specific duration, which gives you time to sell your products and have cash before your payment is due.
4. Be Efficient in Controlling Inventory
Inventory management is also a solution to keep your cash flow healthy. With excess inventory, not only are you being inefficient, but you are also making your money sit around on things that are not moving. To keep your cash flows healthy, you need to properly forecast your sales so you can also get an estimate of how much inventory you need to purchase and keep.
5. Raise Equity
Having problems in your cash flows doesn’t necessarily mean that your business does not have potential anymore. Your business can still look very lucrative to investors. If you are in this situation, raising equity is an option for you to keep your cash flows positive and healthy.
There will be times when you still need capital to expand. In order not to compromise your cash levels, you can go with the option of raising equity by means of a new partner or an initial public offering in the stock market. Taking this step will attract investors and allow you to raise the capital you need to expand your business while keeping your cash flows healthy.
6. Keep Margins Healthy
There are times when unexpected or increased costs would occur depending on the market. If this happens, it is your job to control what you can. This means that you need to have a clear understanding of your margins and costs to be able to keep cash flows healthy.
With this, one way to keep your margins at a safe level is to modify your pricing strategy by keeping margins fixed no matter what the cost is. This means increasing your price until it meets the margins you set out. A price increase will be understandable for your products since raw materials and world markets have also increased. Doing this will let you just follow suit.
Conclusion
“Cash is king”—always remember this statement and let it guide you through managing your business finances. Cash flows are as important as everything else in your company. Unhealthy cash flows can threaten the existence of your business, so keep these tips in mind and always watch out for your cash flows in order to remain competitive and operative.
