Strategies to Manage Cash Flow: Cash flow management happens to be one of the most critical factors that lead to the success of any business venture. Cash flow, in the simplest of terms, refers to the movement of money entering and leaving a business. It includes all cash received by a company through its sales or any other means, as well as the cash that is left for settling different expenses in terms of salary, rent, materials, and utilities among others. If a company finds itself low in cash flow to meet its daily operations, it will be known as a working capital shortage.
Working capital refers to that portion of a firm’s current assets which includes cash, inventory, and accounts receivables less its liabilities. Examples of liabilities include bills and loans that the company has to pay within short periods of time.
MSME owners require long-term strategies for managing cash flow fluctuations to maintain a proper cash flow. This article will discuss several strategies for efficient cash flow management and also improve working capital over a period of time.
Variety of Strategies in Managing Cash Flow
Cash flow management is vital to avoid sudden financial issues in a business. Here below several strategies that businesses can use to manage long-term cash flow fluctuations;
Cash flow forecasting on a regular basis: Cash flow will be effectively managed as one of the most effective ways to forecast future inflows and outflows. This may be in terms of predicting the inflows and outflows a few months or years ahead. Actually, a cash flow forecast will help a business plan in advance for possible challenges or opportunities.
Cash flow projection on a periodic basis can help determine where there will be a surplus or deficit, and steps can then be taken to make appropriate spending and investment decisions for your business.
Reconstruction of emergency cash reserve: Just as individuals save money in a special account to meet any future expense, a similar cash reserve should be maintained to meet emergencies in terms of a shortage of cash flow for business. Such cash reserves can be used by the company to meet its expenses when sales are low or when payments from customers take a long to become due.
It would be important for a business to save a certain amount of this reserve during prosperous times so that it is adequately important in preparation for some unexpected events and emergencies.
Diversify Revenue Streams: A business can go into a shortage of cash flow and have fluctuations if it relies on one income source. The company will suffer in case the income source stops or is reduced. Diversifying revenue streams means offering different products or services or entering new markets. This way, even if one source of income is affected, others can still provide cash inflow to the business.
For example, if you are in the restaurant business and suddenly see reduced dine-in customers, then one of the alternatives you can consider is an online food delivery service at the customer’s doorstep.
Enhance Payment Terms with Customers: One of the cash flow problems most companies will find common is customers taking too long to pay their invoices. Prevent this by making payment terms clear, early payments through discounts, or using tools such as auto-invoicing to remind them.
Monitor accounts receivable closely and chase up customers who are late in making payments. Shortening collection times for payments received from customers can significantly help improve cash flow.
Negotiate better terms with suppliers: The alternative measure is to discuss with suppliers extended payment periods. If the suppliers agree to give this business more time to pay, then the cash flow of the business will be enhanced. This would improve the company’s flexibility in managing its working capital.
Building good relations with suppliers can also help in negotiating favorable terms, which would be in the best interest of both parties. For Example, a supplier may agree to give a longer period of payment for a long-term deal or hike in orders.
Techniques of Improvement in Working Capital
Improving working capital is yet another crucial step to avoid a shortage of cash flows. Here are a few workable techniques that have been applied by businesses;
Inventory Management: Too much inventory can tie up too much working capital which is not required. You may lose the returns on the investment you made if the inventory is not sold or moved to the next operation. The balance is therefore very crucial.
Businesses should always review their inventory levels and position them according to demand. Introducing a JIT (Just-In-Time) inventory system that orders the stock only when it is needed, which can help you to understand how much inventory you should maintain.
Reduce Unnecessary Expenses: Regular review of business expenses may identify areas for savings. Reducing wasteful expenditure shall increase the working capital of the business, in addition to strengthening the financial position of the business.
Significant money will be saved if you reduce unnecessary expenses, suppliers’ costs can be reduced, energy consumption can be reduced, or outsourcing non-core activities can also be reduced.
Use Short-Term Financing Effectively: Taking working capital financing can help to manage working capital in the short run; however, the management of financing should not be excessive. Businesses can utilize borrowing or accessing credit lines and working capital to make up for temporary cash shortages. Higher debt and increased interest payments may, however, result from over-borrowing, which may worsen the company’s financial situation.
Therefore, any enterprise should use balanced funding from external sources and internal cash. To decide on the best sources of financing, it is advisable to look for financial advisors or financial institutions for their services.
Increase Cash Flow Velocity through Accounts Receivable Collections: Similar to the control over payment terms with your customers, the next direction is the management of collections, to minimize the amount of time one takes to collect money from clients. This can be achieved through systems on getting invoices out to apply promptly and through digital payment or even applying for payments before the due date.
Conclusion: Strategies to Manage Cash Flow
MSME requires effective cash flow management so that they can stay long-term successful. These various approaches, such as cash flow forecasting, revenue diversification, improvement of payment terms, and adequate working capital management, will help businesses overcome financial constraints and improve stable growth.
For many businesses, instant cash flow support can be significantly enhanced by applying for an unsecured business loan offered by NBFCs. The lending criteria here are relatively flexible with short turnaround times for approval and in most cases customized loan products to suit the needs of the business. In this way, this access assists entrepreneurs in building funds that are needed to fill gaps in cash flows and investing opportunities, and aid in operational stability at large.
