Cash flow management is among the top most challenges for any entrepreneur.
The simple fact is that it is not just sufficient to get funds to start a business.
One must look at ways to create a steady flow of funds that is necessary to keep the business alive and sustain day to day running of the organization.
It is after all important to remember that effective execution is the only way to make a great entrepreneurial idea succeed.
For that reason it is necessary to keep the finances in place.
Almost 75% of entrepreneurs agreed that cash flow management remains their top challenge.
In fact, study and many leading StartUp data reveals this.
Nearly 47% entrepreneurs consider personal finance stress as primary.
They admit to having either faced the issue or continuing to face it for an extended period till the time business stabilizes.
Therefore, one can only fathom the importance of having an effective cash flow management for the proper functioning of business.
Do you know what is the second most common reasons for businesses failing or companies being forced to shut down?
Inadequate cash flow management and running out of sufficient funds.
Detailed study of over 100 startup failures indicates this.
The problem most time is that while gathering funds could be an uphill task.
But spending it efficiently and wisely is a greater challenge.
The importance of this can be well understood by the fact that most entrepreneurs consider gaining expertise in accounting and finance as a crucial element for recording better success.
As Tim O’Reilly, founder and CEO O’Reilly Media once said,
“Money is like gasoline during a road trip. You don’t want to run out of gas on your trip, but you’re not doing a tour of gas stations.”
The fact is that ‘cash is king’, after all, your employees need to paid regularly.
Therefore, it is true about all the rent and the long list of monthly payment outgo that you would have.
As an efficient entrepreneur, you need to keep no stone unturned in ensuring that your business remains a well-oiled machine run with the cash that you are able to generate.
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The Problem Areas in Cash Flow Management
You would realize that most businesses or entrepreneurial ventures that fail are often.
The reason is that they are not able to manage their cash flow better and hardly.
They are not able to generate desirable returns.
The two main reasons why this happens is because:
- Often entrepreneurs set unrealistic targets for the projected cash flow management from a start up. They invariably overestimate the projected income and underestimate the extent of expenses and payment outgo that they need to meet up on a daily basis to keep the business running effectively.
- Another key reason is the fact that entrepreneurs often are not able to gauge the extent of cash shortage that they might face. This is because of a poor or no proper cash flow management strategy As a result they are forced to suspend operations to balance out the input and output of funds and the overall debt equity ratio that the business is based on.
In this context, one fundamental problem is perception, especially about cash flow management and profitability of business.
Let us understand very clearly that profitability is never same as generating cash flow. It is always important to remember that:
Profit is essentially the difference between the expense incurred and the income generated.
It is invariably based on the numbers recorded when the sale is booked and when the expense is calculated and is never on actual payment received or bill paid.
Cash flow in comparison is the difference between the actual inflow and the outflow.
As a result cash flow goes on to include either working capital infusion that an entrepreneur may resort to or any other type of debt financing that the company has to go through to ensure the smooth functioning of the business without any possible break or stoppage.
Ways to Project Cash Flow Management
That surely brings us to the next port of call in the cash flow management trail.
It is about how exactly do you need to project cash flow to gain a reasonably realistic estimate and not compromise the business basics of your organization either.
One of the simple approaches would be to stick to actuals and project only what can be realistically assess.
So this includes:
- The actual cash in hand- your personal savings, money in hand and actual bank account balance
- List out the anticipated fund inflows including customer payments, debt collection, earnings from interest and money that the company might earn from its investment
- The next logical step after this is to list out the outflow as well in equally detailed manner. This should account for monthly salary payroll, overhead payment, tax liability, possible debt payment and also possible liability from future tax obligations
- You must also list out the future expenses that you might have to incur like investing in new machinery, expenses for creating brand awareness and other marketing initiatives.
Once all these elements have been accounted for, your next step involves putting them in an excel sheet in a proper order.
This facilitates regular assessment and update of the same without any kind of problem and harassment in following of a proper cash flow management strategy for your business.
– Cash Flow Management Software
As a first time entrepreneur, you can even look at taking advantage of the many interesting and easy to use software that are available for easy accounting.
This regular updating is crucial as it will keep you abreast of any negative cash balance that you might register.
You have to remember that even a small amount of negative cash balance can be a huge problem for the business and in no situation can the business run smoothly with negative cash balance.
The regular accounting helps you to stay on top of this problem at all times.
In fact in the interest of your company’s long term gains, it pays to be exceptionally conservative in this aspect and keep the inflow estimate on lower than expected levels and projected outflow at the higher end.
What this instantly seeks to achieve is a small buffer that will help you tide over possible exigencies that you might face during the course of running the business.
Remember ending up with negative cash flow almost invariably means loss of business, trust and credibility and that is a big ‘avoid’ for a startup trying to buy a successful business model.
Another effective tool to rein in your cash flow management is tracking the actuals.
Compare and contrast the projected numbers with the actual cash flow as and when required.
This will not only help you stay updated on the company’s business but also help you gain a realistic idea on the expected level of cash flow from a specific function or endeavor.
This kind of exercise also goes well in helping entrepreneurs learning from past experiences and creating better buffers for future transactions.
Better Cash Flow Management
So that brings us to the fundamental aspect that what and how should you go about following a cash flow management strategy in your firm to create a strong gateway for future successes.
The two main aspects are managing the receivables better and organizing the payables in a clear manner to ensure that there are no major slip ups.
1. Tracking Your Receivables
1) Remember that in most businesses, you are never paid instantly and that by far, is the most important reason why cash flow management problems come to foray at all.
This is exactly why effective tracking and management of receivables is so important.
The trick is to create some easy to implement and effective alternatives to ensure better flow of the fund that you expect to receive.
2) You can begin by offering discount to customers for faster payment of bills.
3) Make deposit payment mandatory while placing orders.
4) Do away with outdated inventory that might result in greater fun outflow than inflow
5) In the case of non-cash paying customers, accept orders only after a thorough credit check.
Remember it is always better to have one customer less compared to having a problematic customer.
6) Make it a practice to issue invoices as soon as you accept orders and follow them up meticulously for faster delivery of receivables.
This will ensure that the pace of receiving payment will rise instantly and bring in better fund inflow.
The next challenge, therefore, is that you also have to organize your payables in a way that there is no sudden and urgent outflow and every month the payment and inflow happen in a well-regulated fashion.
Putting in a proper system facilitates not just better cash flow management but your company also gains by avoiding late payments in many instances.
This also helps in keeping a check on expenses.
Remember there is no room for complacency, and if not reined in on time it will only result in a bigger gap between inflow and outflow leading to future cash flow trouble.
Just like in case of receivables, create a system for payables too.
Pay close attention to the terms and conditions put forth by the creditor and take advantage of them in every way.
For example, if you have a 30-day period to make payment don’t strain your resources to pay in 15 days.
If you have a 90-day credit period, then organise your payables and receivables in a way that one accounts for the other without unnecessarily straining the system.
Also, try to extend retaining funds as long as possible.
For example, if you make an electronic transfer of funds closer to the due date, you will be able to remain current with suppliers without stretching your resources too much.
In case you are facing any financial crunch, try and communicate with your suppliers about potential extension of your credit till a new inflow comes in.
In this way, you can manage both ends without straining the cash flow management situation.
Don’t always fall for discount offers without paying attention to details.
Go through every possible and minute detail of the deal to ensure that your outgo is never more than estimates with or without discount.
Your reputation matters a lot in taking forward the business.
Therefore, it is extremely important that while you manage your expense, you do not cut corners that are crucial.
So settling for the lowest priced supplier is not a great way to go about doing business all the time.
Perhaps what you need is a supplier who delivers reasonably priced goods with a more flexible payment schedule.
How to Handle Cash Shortage?
Let’s say that despite all your precautionary measures, you still end up with a certain amount of cash shortage.
How are you going to handle that situation?
Speed is one of the best keys to addressing this situation.
The sooner you are able to identify the problem point the better prepared you can be about dealing with a potential shortage.
Even if you have to borrow or take a loan from a bank, it is much better to apply for it well in time rather than being a hand to mouth borrower.
When you apply well in time, you give the impression that you are a well-planned entrepreneur with a foresight about future needs.
That leaves a good impression with a banker and gives them greater assurance of recovering a loan as compared to somebody who applies for a loan today and needs money today as well.
Bankers in general are wary of putting their money in such initiatives.
Another key to creating a healthy cash flow management is creating effective channels of communication with your suppliers as well as customers.
If you are anticipating a credit crunch, try and convince your suppliers to extend credit period.
You can even request your customers to make urgent payment at certain times to tide over the potential crisis.
Resourcefulness is the other name for effective entrepreneurship.
Therefore, you need to look for all avenues to generate money and have the proper cash flow management strategies.
You can even consider raising funds by leasing machinery and office furniture to tide over any sudden crisis.
This also highlights the entrepreneur’s commitment towards the venture’s success.
Organize your bill payment effectively as well.
Sometimes what happens is that you pay smaller amounts and larger bills keep pending for a longer duration.
And suddenly you can be faced with a severe crunch in terms of cash to tide over these payments.
Therefore, it is a much better idea to be organized and regular in bill payment and plan it as per your needs.
In short, cash flow management is literally the backbone of effective entrepreneurship.
Proper cash flow management strategies provide the source of sustenance to take forward a business over the long run and work out efficient strategy to ensure flawless execution of the entrepreneur’s dreams.
Efficient cash flow management strategies are also an indicator of a well balanced and a well-managed business.
As a result, an entrepreneur on the back of good cash flow management can aspire to look at attracting more investment towards further expanding their business.