Cash flow management is a key indicator of financial health. Whether your business is just beginning or growing – here are the essential tips to managing cash flow effectively.
Understanding a company’s financial situation is crucial to making sound business decisions. Business owners / entrepreneurs must strive to understand the cash aspect of their enterprise, regardless of the profits reported. This practice will not only help sustain the ongoing business operations but will also help the business grow, regardless of any season or situation.
Cash flows represent the lifeline of any business, big or small. Positive cash flow is essential for the business to survive in the market. Studies claim that most businesses fail just because they cannot manage their cash flows. Several factors contribute to this; a few are listed below.
1. Ignoring seasonal nature of the business
Ignoring the seasonal nature of your business is one of the biggest mistakes that can kill your business. Once peak season ends, a slow period begins, where many businesses come to a halt. It leads to overhead commitments that are difficult to maintain during the rest of the year.
For example, businesses especially those who are in food and beverages, clothes, cosmetics, appliances, etc, find themselves tremendously cash-rich during peak seasons like festivals, marriage, etc. Such business should make enough provisions for these peak seasons in order to increase cash-flow. For the rest of the year, sales deplete rapidly, resulting in less income. Moreover, off-seasons result in discounts and offers, which reduce the margins for the sake of maintaining some level of sales.
Wisely utilizing your off-season can benefit you in the long term. It will not only set your business up but will also help you stay afloat in the market all throughout the year.
Some businesses overspend or spend on the wrong things at the wrong time. This undisciplined or unfocused budgeting approach can sink the business much faster than one could imagine. Any business can be hit with unplanned expenses. Haphazard spending will not only get your business off the ground but will also incur too much debt upfront. And you never know when this debt can quickly spiral into a nightmarish situation.
So, control your enthusiasm when you are spending your money. Carefully consider every expense and investment so that your valuable capital doesn't leak away before you begin generating profits.
3. Incorrect calculation of profitability
Many-a-times, businesses feel that there is enough profit from every transaction they enter into. Underestimating such expenses is bound to lead to an incorrect profit calculation. With multiple obvious and less obvious costs that occur, it’s no wonder that some just slip through the cracks. For example, A healthy, cash-rich company that buys a huge office on rent or invests too much in fancy utilities, etc. might treat them as trivial at first. But later, when the going gets tough, it becomes difficult for the company to keep up with these excessive costs. And as a result, they end up losing cash rapidly.
Hence, it is essential for you to understand what impacts your profit. Anticipate all types of expenses and understand their consequences so that you can maintain the well-being of the company.
4. Ignoring late payments
One of the biggest problems that businesses face today is poor payment practices where their customers fail to make the payment on time. This aspect largely impacts businesses especially small-scale businesses since they have limited cash flow. As a result, such businesses cannot take new projects or fill large orders, as they are fearful of overextending their financial exposure. They are even not able to pay the suppliers on time, which later impacts the future relationship between them. With this inability to run operations smoothly, businesses end up taking loans to cover such expenses. And at worse times, it causes businesses to shut down completely.
Therefore, it is essential for businesses to manage their collection process, to ensure on-time payments from the customers.
5. Improper management of taxes
Taxes, whether you like it or not, has to be paid on time whenever it is due. Improper management of taxes can attract interests and penalties that can influence the cash flows. In some cases, if a taxpayer or a company fails to comply with the notice issued by the income tax department, then the assessing officer can issue a notice, either asking to file the return of income or to furnish in writing all the details of assets and liabilities. This can further attract more penalties and interests on penalties.
So, it’s always wise to plan for such uncertainties. If needed, seek the help of an expert tax consultant. He/she will help you identify the approximate amount of tax that you need to pay every year. It will have a long-lasting impact and will help the company maintain its profits.
6. Cost of bad hiring
A bad hire may be unavoidable at times. But nonetheless, this mistake can affect an organization’s cash flow.
It costs money to hire employees – e.g. job postings, creating ads, paying the recruiter requires money. But even after the new employee joins a company, there is onboarding expenditure to consider. Plus, the fact that the new recruit may not be as productive or skilled as an experienced person – this is again a matter of concern.
The price to pay for a bad hire goes beyond just the cost. And when bad hires leave the organization, they leave behind a trail of loss – i.e. loss of time, loss of productivity and ultimately, loss of revenue. Eventually, you are back to square one, with a position left to fill. So, always develop an efficient hiring plan and execute it meticulously. It will not only avoid bad hires but will also help maintain the company’s cashflow.
7. Not preparing in advance for acts of God
An 'Act of God' is defined as an accident that is caused directly and exclusively by natural causes without human intervention. This term is usually used by insurance companies to describe natural events that can’t be predicted or controlled by humans. The direct and indirect impacts of natural disasters are devastating to business activities and their continuity. Not preparing in advance for such incidents can create both psychological distress and additional debt burdens for business owners. In worst cases, it can lead to a complete shutdown of the business. Therefore, a company should have a proper plan in hand. One should have an emergency fund in place, to at least keep the business running with bare necessities, during such times.
Proper cash flow is essential for the sustenance, growth and longevity of business. Hence, entrepreneurs or business owners must develop the right budgeting strategies. Your management and back-office team should analyze the various trends and economic factors that can affect your business and create a business plan accordingly to help the company remain perennially profitable.