It is said that “cash flow is king” in the business world. A healthy cash flow is the heartbeat of any business. However, even after achieving your targeted cash flow if you are left with peanuts at the end of the cash cycle, it might be counterintuitive. For small businesses it becomes especially important to manage whatever cash they are making as effectively as possible.

The following are some of the cash flow ideas for small businesses to ensure its effective and efficient management:

1) Prepare weekly forecasts: Depending on the operating cycle of your business, it is better to prepare forecasts either weekly or monthly to enable optimum planning and also to enable tracking of unplanned expenditures.

2) Negotiating better terms: The creditors can be approached for obtaining better terms which might be in the form of either a longer credit period or a deeper discount for early repayment. It needs to be worked out which would be cheaper for the company – whether opting for the early payment discount or to pay it at the end of the credit term at the agreed rates. This decision would depend on the cost of funds applicable to the company.

3) Stricter collection of receivables: Depending on the business scenario, the entity should try to enforce quicker realisation of debtors while making sure that the same does not result in a drop in sales. Debtors also will be in need of adequate credit without which they may not want to deal with the entity.

4) Use of cash management ratios: One of the ways to keep track of the cash flow within the entity is the use of cash management ratios such as current ratio, liquid ratio, working capital turnover, etc. These ratios need to be compared with industry standards to obtain an understanding of what is favourable and what is not.

5) Auto-sweep facility: While this may seem like an insignificant measure, the cost of funds kept idle in bank accounts do add up. Most major banks these days offer the facility of auto-sweep of funds where the funds beyond a certain minimum balance are automatically invested in a fixed deposit automatically. When the bank balance goes below a particular limit, the funds are again automatically credited back to the bank account. This allows the entity to earn interest on the idle funds as well.

6) Setting aside of cash reserves: In case the entity is receiving favourable cash flows it must use the opportunity to set aside the excess and save them in liquid securities to make provisions for any future shortfalls.

7) Inventory-tracking: The entity might be under the opinion that the cash must be invested into either producing or purchasing inventory (depending on the type of business) so that the same can be sold and generate more cash for the business. This might hold true only if the inventory is fast moving. If the amount gets locked up in slow moving or dead inventory, it might become more expensive for the company since the money could be better spent towards other revenue generating activities instead.

8) Control expenses: Where the entity is facing especially difficult cash flow scenarios, it needs to classify expenses in order of priority and only pay those expenses that are required for the bare minimum operations. The other expenses can be put off until the cash flow is sorted. Further, the entity can investigate and try to find different ways to reduce unnecessary expenditures and control costs accordingly.

Conclusion

The significance of effective cash flow management cannot be understated. The right kind of decision-making can lead to the difference between a thriving enterprise and a failed one. Not being able to make payments on time can also lead to having a bad name in the market, discouraging vendors from supplying to the entity and it can also lead to a bad credit score, leading to a higher cost of funds. For further information on how to go about the above points and even more cash management tips, please contact info@bclindia.in