What is Cash Flow
Cash flow is simply the amount of cash that comes in and leaves your business over a period of time. It can be classified into positive and negative cash flow. When you have more cash coming into your business than it is leaving, it is considered as positive cash flow. This cash can be used to pay your bills and other expenses. Whereas negative cash flow is when the cash coming into your business is less than the money leaving. It causes a shortage of cash for your expenses.
Managing Your Cash Flow
Cash flow is an important part of running a successful business and it needs to be taken care of seriously. The ultimate aim of managing the cash flow is to generate more income than expenses. As cash is an important factor for running a business it has to be properly managed and controlled to meet all the business expenses without any delay. It helps the business run its everyday operations, pay bills, make purchases, etc. Failing to generate enough cash to manage the business operation can cause trouble. The business owner might have to take on debt to meet their business expenses. If the business has more cash on hand than its expenses, the owners should consider investing the cash to generate more cash.
6 Ways to Manage Your Cash Flow Effectively
- Receivable management
Negotiate on payment terms that work best for you. Make sure your customers make the payment on time. Offering incentives on early payments will help you receive the payments much faster. If it is a large project, ask for an advance payment and collect the rest at specific intervals or delivery of the product or services.
- Cash flow forecast
Analyze the trends from past financial statements to forecast an estimated budget for the coming quarter or year. It will help you foresee upcoming expenses and gets you time to arrange funds or extend the credits.
- Delay your payables
You don’t have to make early payments to your vendors unless there are any necessary incentives. The amount can be paid when the deadline approach so you won’t risk paying any late fees. It keeps the cash in your account for a longer time.
- Effective Inventory Management
Analyze your sales on what product is moving and what is not. Optimize your operations in a way that would increase the overall profit than stack up nonmoving inventories in the warehouse.
- Maintain a cash reserve cash for an emergency
Maintaining an emergency cash reserve helps you survive in the market if you face unexpected cash shortages or challenges. It is always good to have at least three to six months’ worth of expenses aside.
- Liquidate unused assets
Consider selling assets like machinery or equipment that you no longer use and clear out your old inventory with a discount or promotion. This will help you generate some quick cash.
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