If you have owned your business for any length of time, you might know what it is like to run short of cash for your business. This leads to an inability to meet your business obligations, such as paying your suppliers, creditors, or employees. It is an unpleasant situation to be in, to say the least, and not an experience you want to repeat. Your business cannot survive without positive cash flow. So, learning some basic cash flow management techniques is the first step to ensuring that your business survives and thrives through the difficulties of business.
In this blog, we’ll explore:
- Why is positive cash flow so important?
- Tips to always have a positive cash flow
- Automa8e
Why is positive cash flow so important?
Cash flow is how money moves through your business. If you have positive cash flow, you have more physical cash coming into your business than leaving every month. Once you have this cash, you can pay your suppliers and other creditors, buy more inventory to continue your business, reinvest cash to expand, and pay yourself.
The problem comes when you make sales “on paper” but have not received the cash from them, and there is more cash going out than coming in. This is negative cash flow. There can be many reasons for negative cash flow in each month, and all of them lead to awkward situations. Your payment terms are too generous, and your customers are paying you late. It also can be the case you do not have a good invoice system in place. Or you are having budgeting troubles, and you spent the money you had on a new piece of equipment before you paid your other obligations. In any case, if you wish to continue to have a solvent business, you need to turn this situation around quickly.
Tips to always have a positive cash flow
1. Invoice customers promptly and have payment terms that work for you.
You require your customers to pay within 60 days (about 2 months). If this is not working for you, or if your customers routinely wait until the end of the period to pay, you may need to reduce it to 30 or even 15 days (about 2 weeks). Or you are just so busy with other tasks to keep your business afloat that you put off processing your invoices. That can lead to the customers receiving them late and you receiving their payments even later. In this case, it is time for you to use an electronic invoicing service like Automa8e, which generates invoices for your customers and allows you to send email reminders as the payment due date comes near. Automa8e also helps the business owner to analyze the payment pattern and AR receivable days ratio to determine the credit terms. The business owners should review the customer’s credit terms regularly.
2. Make wise inventory and sales decisions to maximise sales and keep inventory moving.
If you have a lot of money tied up in inventory, that may be affecting your cash flow. Study your products to see which ones are selling well, cycling between cash to inventory to cash again, and which ones are sitting in inventory, not turning back into cash. You may need to sell your slow-moving inventory items at a discount to get the cash from them and then focus your inventory on items with a faster turnover. With Automa8e, you can see immediately what your best-selling items are by region and seller to make future purchasing decisions.
3. Watch where you spend your money and borrow before you need some.
If you have been having negative cash flow problems for a few months now, take some time to study your books and see where your money is going (or not going). This can help you to create a cash flow forecast to see what your cash flow needs might be for the next quarter.
The first step to creating a cash flow forecast is to lay out all your upcoming expenses, both one-time and recurring. Make sure you include everything – rent, software, salary, marketing – and when it is due.
The second step is to forecast your revenue. This can be tricky, as you do not know exactly what sales you will make but do the best you can based on historical data. Start with any guaranteed revenues and continue to make the most accurate sales estimate. If you have more than one revenue stream for your business, make a separate line on your spreadsheet for each revenue stream.
Next, you need to keep your cash flow statement updated every week. Make sure that your cash flow statement matches your bank statement balance and reconcile it if it does not for some reason.
After you have done this, you will be able to look ahead for a month or two to see where you will have any cash shortfalls. This will enable you to work out payment plans with suppliers ahead of time or borrow money for a foreseen shortfall.
Cashflow statement indirect method
If this method does not work for you, you can also make a cash flow statement using the indirect method. With this method, you can deduce your cash flow from your net income for the month. Cash flow can be calculated indirectly by starting with your net income and adjusting based on various balance sheet items, thereby converting accrual income to cash.
Timing is key
As you can see, timing and prior planning are the keys to successful cash flow management. Consistently having positive cash flow sets your business on the path to success, month over month and year over year. You will be able to have money to meet your obligations, pay yourself a salary, and be able to reinvest money in your business to take it to the next level.
About Automa8e:
Automa8e is an AI-powered accounting software and document management solution that empowers businesses in Singapore by delivering invaluable information and practical guides for a wide range of business functions and day-to-day operations. At Automa8e, our mission is to provide businesses with the knowledge and insights necessary to make intelligent decisions, enabling them to thrive and succeed. We are committed to sharing valuable information and aim to be the trusted partner that empowers businesses to achieve their goals through informed decision-making. With our comprehensive suite of tools and resources, we are dedicated to supporting businesses in Singapore on their path to success. Schedule a call now and discover how Automa8e can add value to your business.