When you run a business, the foremost and most particular thing that you need to keep in critical check is your cash flow. A poorly managed cash flow has brought many booming businesses to lean and even go extinct. This has been proven by many studies made in the economic & finance industry.
All you need to do is to comprehend the below mentioned rules and you will end up doing great in your business.
Initially, profits & accounting is the same thing
The reason behind a successful business is the genuine stable accounting process. You have to cater to bills and costs without having to calculate your profits in actual money flow because initially, they are only in the accounts.
Cash flow is more than simple mathematics
You can’t do simple calculation of the cash flow like you bought one thing and sold one thing because business and profit are more than this, and it’s all in the ledgers. Selling a product doesn’t necessarily mean that you got the money from your client, buying a product doesn’t mean that you already paid for it. You buy your inventory and you pay it at a certain moment in time, you sell it maybe later, and only then it becomes cost of sales.
You can only growth if you have the cash
Of course you want your business to grow. But be careful, growth can lead to problems. It’s a fantastic thing to grow your business but when you pay in advance but are paid months later, this can massively affect your cash flow. And cash in bank. Which is your engine for growth. And you need more of it as you grow faster.
Business-to-business sales are tricky for healthy cash flow
They are tricky for the reason that you are not dealing with the end user. Your customer is another business who will then sell or use the service and earn money out of it and will then clear your bill. This whole process often takes month and thus disturbs your cash flow.
Inventory can be a load on the cash flow
The money spent on inventory is gone for long and you need to understand that it will take its due time before it starts to pay back in the shape of cash flow but you inevitably need to spend more to build your business. Every dollar blocked in inventory is a dollar you can’t use for business growth. The same is with the money you wait to come from your clients, every dollar you expect to receive is a dollar you can’t use, for you don’t have it.
You must become a master of working capital
Working capital is the amount that is running in the ledgers as per the accounting of your business. It’s the money that you have at hand, or in your bank account, to pay your bills, your expenses, to your suppliers for making inventory, while you wait to get paid by your clients.
Treat bankers carefully
Some say bankers hate surprises. It’s so true. If you foresee a spike, an opportunity or a problem, prepare a plan and present it to the bankers, the better you’ll be armed with the information they want to see and hear.
Don’t lose your business out of your sight. Do what you’re good at but always keep an eye on the key indicators that will tell your business health status:
- Payment days – how long you are allowed to wait to pay your suppliers
- Collection days – how long you wait to get paid
- Inventory turnover – how long your inventory sits in your warehouse on your working capital, impeding your cash flow