How to Manage Cash Flow in Business?

The key to a sustainable business is its financial and cash flow management! Your working capital helps you define realistic business growth plans, goals and grab the opportunities on your way. Whether you want to scale up the operations, expand the existing structure, purchase state-of-the-art machines and equipment, or need help in maintaining your day-to-day capital, cash flow management plays a crucial role for all of them.

Cash flow management strategy prevents cash crunch scenarios as it helps you track, analyse and improve the financials of your business.

7 Useful Tips to Manage Cash Flow in Business

• Multiply your cash in hand: The multiplier effect is a common business term, meaning the number of times a particular note rotates to generate business transactions in the market. Blocking your savings for a longer duration leads to a lower cash flow. So, try and keep the cash in hand rotating by maintaining cash liquidity in the form of reinvestment in your daily business activities.
• Prioritise cash flow over profits: The secret to successful business growth is all about how you manage cash flow in the business. Many financial figures factor into your cash flow like accounts receivable, inventory, accounts payable, capital expenditures, and taxation. Always check your earnings against your break-even point for positive cash flow. If your earnings are high, and you still face a cash crunch, then it is a sign of poor cash flow management; you must evaluate your finances to resolve the problem.
• Set an emergency cash reserve fund: No matter how well you plan, risks are always present in a business. Having a contingency fund gives your business the flexibility and security to sustain during economic downturns. A proper cash management plan keeps your assets well-guarded and insures your product and machinery. Ensure you have enough to cover at least three to six months worth of expenses.
• Innovate constantly: Change is the new constant. Regular research and periodic analysis, alongside constant adaptation to what’s new in the market, drive business and keeps you a step ahead of your competition. The same rule needs to be applied when it comes to cash flow management. There are various products available that can help manage the cash flow because of the features they come with, like easy repayment options, no pre-payment charges and the most negligible processing charges. These can become critical factors in solving cash flow issues and help businesses capitalise on various potential business opportunities. You can also check out for such feature-rich Poonawalla Fincorp affordable Business Loan to encash business opportunities that come your way without hampering the working capital.
• Set prompt Payment terms: Another option for managing cash flow is setting up aggressive payment terms with your customers. It is imperative to establish clear payment terms with a faster turnaround to the invoices raised. It helps you to manage cash flow flow in your business effectively. Make sure to lay out the terms of when the payments need to be made in the contract. In particular, for projects which require heavy resources, it is best to set a milestone-based payment terms to cover necessary expenses.
• Continuous Monitoring: Be it business expansion, starting a new section, growing staff, etc; all are a good sign that your business is doing well. However, it also adds to your cash flow management responsibilities. Keeping track is an essential part of owning a business, but it should not be your only focus point. Assign a trusted employee to monitor it for you and keep you up-to-date.
• Borrowing Options: For a smooth functioning business, you constantly need cash flow for payroll, rent, raw materials, overheads and EMI / debt payments. A business should adequately maintain its cash flow, but it is a smart decision to avail of an unsecured Business Loan at the time of cash crunch. It provides credit for a flexible tenure at lower interest rates and without any collateral. Being ready with your borrowing avenues is always a quicker solution to address the cash flow crunch.

A steady flow of cash across the business supply chain ensures the smooth running of business operations. Access to a quick financing option can facilitate cash flow, thereby enhancing the liquidity needed in the supply chain. You can apply for an Unsecured Business Loan with Poonawalla Fincorp, where we have a simplified loan application journey with quick disbursals.
Now that you know the strategies to manage cash flow in a business, plan and account for the ones that successfully work as per your current business stage to help you grow.

What is Cash Flow Management?

Simply put, cash flow refers to the movement of money in and out of a business, including revenue from sales, expenses, and investments. Cash flow management involves tracking, analyzing, and maintaining a record of the inflow and outflow of cash of a business entity. It is done to further determine if a business has enough capital to run efficiently and can fulfil various expenses like payment of bills and debts, managing day-to-day operational costs, etc.

Why is Managing Cash Flow Necessary for Small Businesses?

Managing cash flow is crucial for small businesses in India due to several reasons. It is essential for small businesses to effectively manage their cash flow to ensure their financial stability and sustainability.

Here are some reasons why managing cash flow is necessary for small businesses in India:

• Operational Continuity: Cash flow management is vital for the day-to-day operations of small businesses. It enables them to pay their suppliers, meet payroll obligations, cover utility bills, and maintain inventory levels.
• Managing Expenses: Small businesses need to keep a close eye on their expenses to maintain profitability. Effective cash flow management allows them to monitor their outgoing cash and identify areas where they can reduce costs or negotiate better deals with suppliers.
• Planning and Budgeting: Cash flow management helps small businesses in India develop comprehensive financial plans and budgets. By accurately forecasting their cash inflows and outflows, businesses can identify potential cash shortfalls in advance and take necessary measures to bridge the gap.
• Handling Seasonal Fluctuations: Many small businesses in India experience seasonal fluctuations in revenue and expenses. Managing cash flow allows them to navigate through lean periods when sales are slow, or costs are high.
• Debt Management: Small businesses in India may have outstanding loans or credit obligations. Managing cash flow ensures they have sufficient funds to clear these debts promptly. Timely loan repayments positively impact a business's credit rating, improving its credibility and fostering better relationships with lenders.
• Growth and Expansion: Small businesses with healthy cash flow management have greater flexibility to pursue growth opportunities. They can invest in marketing initiatives, upgrade equipment, expand their product lines, or enter new markets.
• Access to Capital: Effective cash flow management enhances the creditworthiness of small businesses, making it easier for them to secure Business Loans or attract potential investors. By demonstrating strong cash flow management, small businesses increase their chances of accessing capital for expansion, working capital, or other investment needs.

Conclusion

In conclusion, managing cash flow is crucial for small businesses in India to maintain operational continuity, monitor expenses, plan effectively, handle seasonal fluctuations, access capital, service debts, and drive growth. By implementing robust cash flow management practices, small businesses can strengthen their financial position, enhance their competitiveness, and thrive in a dynamic business environment.

FAQs

• Does cash flow mean profit?

No, cash flow does not necessarily mean profit. Cash flow reflects the movement of money in and out of a business, while profit measures the financial gain after deducting all expenses. Both indicators are important for assessing a company's financial performance and sustainability.

• What is meant by cash flow in the balance sheet?

Cash flow in the balance sheet refers to the movement of cash into and out of a company during a specific period. It represents the inflows and outflows of cash resulting from the company's operating activities, investing activities, and financing activities. The cash flow statement, which is a part of the financial statements, provides a detailed account of the cash inflows and outflows, enabling stakeholders to assess a company's ability to generate and manage cash.

• What are the 2 methods of cash flow?

There are mainly two methods of determining the cash flow of a business, which are:

The Direct Method: The direct method of cash flow focuses on tracking the actual cash inflows and outflows during a specific period.

The Indirect Method: The indirect method of cash flow takes a different approach by starting with net income and then adjusting it to reflect the actual cash flow from operating activities.

Both methods aim to provide insights into cash flow, but they differ in terms of the level of detail and approach. The choice between these methods depends on factors such as regulatory requirements, reporting standards, and the specific needs of the user.