Cash flow is a very basic business and accounting concept revolving around the daily incoming and outgoing cash for the business. Cash is important to run a business from buying huge amounts of raw material to daily miscellaneous costs. Cash is King, Hence it is essential that businesses maintain a positive cash flow.
This means there should be more cash coming into the business than the amount of cash going out. There are two main ways to achieve an increase in cash flow, you either increase the incoming cash or reduce the outgoing cash. In this blog we will talk about different strategies that satisfy one of the methods or even both, to increase cash flow, and ensure financial prosperity for your business.
Smart Inventory Management
As a small business your finances are limited, it would be disastrous to instantly freeze your cash flow by buying too much inventory and raw materials. This means you will not get that money back until the goods are sold, you may miss out on better investment opportunities and deals from suppliers because of buying too much and too early.
On the other hand you cannot have too little inventory and raw materials because this will increase production time and costs and you may even miss out on opportunities to sell your product simply because you did not have any inventory on standby to start production.
Adopting a Just In Time inventory management system can mean that you have the minimum amount of stock required for each day and a supplier who can provide quick deliveries to aid for larger orders. Also to have a smart inventory management system, you should be aware of what is part of your inventory so conduct regular inventory audits too. This will allow you to track slow selling inventory which you should get rid of by offers before they become obsolete.
Control Expenses
The biggest chunk of cash outflow can be credited to expenses. So if we have lower expenses we can have a smaller amount leaving our accounts. The trick is to reduce expenses and other costs without reducing the income and output produced. For example, if you reduce your workforce by half your productivity will also be lower and even if you sell everything the cash inflow will also be lower.
The owner must decide strategically, which costs are more beneficial to control, for example many companies have now decided to ditch plastic wrappings for their products and instead replaced them with paper seals. This is because paper was cheaper and it was only affecting packaging and not the main product itself.
Another way to reduce costs is negotiating better deals with suppliers, by buying in bulk and other ways in which the firm can trigger economies of scale. By strategically increasing output a point can be achieved where the average costs are spread so much that it becomes easier to recover cash per unit sold.
Increase Sales and Revenue
The main cash inflow of any business is the revenue they generate from the sale of their goods. So in order to have more money coming in just sell more right ? Yes, but the question is how. As a small venture your sources may be limited, but never non existent. You may list your products online and sell them using e-commerce techniques.
You may have to make a website for more streamlined processes but these are inexpensive ways to open up limitless streams of potential revenue. Obviously better branding and marketing would lead to higher sales so focusing on that may be helpful too. You can have ads rolling out on social media platforms or have influencers review your product all these create an organic market for your product online which would lead to a boost in sales.
Utilize Other Financing Options
Sometimes your business just requires an extra pump of cash that would take a lot of time if the only source is retained profits. In this case the firm can look at other ways to gain a quick influx of cash, if the business is a limited company, shares can be sold to gain investment but it would mean losing ownership of the business if too many shares are sold.
A small business is more likely to get into a partnership to raise capital however, these are not the only ways. You can also take a bank loan, utilize a line of credit or even use the company credit card if the limit is sufficient for your needs.
However make sure to keep an eye on your credit score since after credit inquiries a hard credit check is done which can temporarily reduce the credit score, so do not inquire for too many credit lines simultaneously and keep an eye out for your credit score.
A great way to keep an eye on your credit is by utilizing a credit report consisting of online international business credit check, and in depth information about all factors impacting your creditworthiness. This will ensure you can maintain credibility and acquire credit in the future.
Prepare Cash Flow Forecasts
As the name suggests, cash flow forecasts predict the future cash flow based on the patterns of the firm’s transactional history. The softwares and technology available today has allowed us to gather huge data sets and thus forecasts can be highly accurate.
By utilizing forecasts firms can prepare for the situations beforehand and ensure they have a stable inflow and outflow, however they should always keep a small amount of emergency funds, to allocate for unforeseen circumstances.
Conclusion
To recap, by using the mentioned strategies a small and new business can improve the cash flow situation in their favor. Nobody likes to scramble and struggle to arrange cash on due times, so we can see how freezing our money in inventory can be bad as it would take time to liquidate. By controlling costs and eliminating any useless costs unnecessary outflow can be reduced and combining it with new sales strategies can boost inflows to create a positive effect on the financial situation.