In simple terms, it’s the sum of the amount you’ve brought out and what’s going out. Based on that it’s easy to conclude that if the former is greater than the other and all is good. But keep in mind that cash flow isn’t as simple as profit.
An abundance of unpaid items sitting in accounts receivables and not being paid for for several weeks might appear to be lucrative on paper. However, they could put your company in a tense situation. Particularly if you have accounts payable that are not paid to which your supplier is demanding immediate payment.
These types of gaps are, paradoxically, especially risky for businesses that are based on products and have rapid growth, and are profitable. Why? because every time you acquire an additional client you’ll need to purchase raw materials in order to meet their needs (not to forget investing in new staff as well as machinery) before you are paid.
What steps can you do to prevent problems with cash flow, and also increase your cash position in general?
1. Keep a Cash Flow Forecast
There’s always a risk in the business world, but making sure that those cash flow estimates are precise and up-to-date can assist you to face the uncertainty with confidence. Reviewing last year’s sales will provide a solid idea of the kind of sales you’ll accomplish this year. If a loss or crisis of sales has occurred then you can shift to a month-by-month review and then build on it.
You should then calculate the cost for the production of your goods and services. This can help you adjust your plan in case massive new orders come in suddenly.
Also, at the same time make sure you include all fixed costs, including the costs of maintaining your property and the cost of paying your employees, including rent, salaries bills, business rates, business bills, and of course, tax requirements.
2. Compare your projections to the reality
Your forecasts are useless unless you constantly examine them against actual data to determine if you were on the right track.
If you do this on a month-to-month basis can allow you to tweak your calculations which will allow you to predict how much cash you’ll have over the course of a week, a month, or even a whole year from now.
3. Make several cash flow forecasts
The best way to guard yourself against any unexpected surprises is to make three distinct projections:
A best-case scenario
A worst-case scenario
An alternative that is middle of the road
In order to calculate these figures, You will have to examine how your market is developing and consider the impact of seasonal cash flow issues and consider whether new competitors could pose threats and consider whether your current customers are completely satisfied or considering switching to different suppliers.
You can now manage these projections using traditional spreadsheets. If you’re looking for an efficient method, you might be interested in an enterprise planning software like LivePlan. Whatever you decide to use make sure you keep them current according to the trends you’re seeing and make sure that they reflect your current financial position.
4. Make sure you are realistic.
Don’t fall for the lure of thinking that everything will go according to plan An unrealistically optimistic forecast can quickly cause troubles.
Don’t alter dates in this manner, and ensure that the numbers are accurate. If there’s a chance that there will be issues in the future You should be aware of them right away so you can prevent them from happening.
Actionable Insights of Cash Flow
The signs of typical cash flow issues
When it comes to problems It can be difficult to recognize them while you’re continuously monitoring the flow of cash and monitoring it. However, it doesn’t need to be. All you need to do is recognize the possible signs that could indicate future or ongoing issues.
While you go through the steps to refine your method to avoid cash flow issues, keep these five indicators in mind to help avoid the most common cash flow problems.
1. Your accounts receivables are over the top.
A lot of businesses bill their customers and then receive the payment once the product or service is provided, which is why it’s not unusual to have invoices that are not paid at any given time. The problem is that, until your client has paid, you won’t have cash on hand to you to pay for your costs. It’s just a matter of the assurance of their payment.
If you’re finding that each year, the receivables have become more expensive, but you’re not drawing more cash in then is it time for you to have a long examine your terms of payment and invoicing process?
To find out if your business is collecting its accounts receivables be sure to keep track of your receivables’ turnover percentage (net credit sales over the average balance of accounts receivables). If your ratio is low, it could mean that it’s time to review your policies and terms for payment.
2. You have a large inventory, but small order volumes
Businesses that offer their products to other companies may want to have plenty of stock so that they can take orders of all sizes. However, if the majority or all of your money is tangled to that inventory and your customers don’t have the time to purchase, you may be able to spot issues.
If your inventory items remain unsold, you won’t have money in liquid form to pay for your expenses. Additionally, you’re probably having to pay for storage, and then you’re at risk of the risk of your inventory becoming lost or damaged, or becoming outdated or less in demand prior to being able to relocate it.
3. You’re extending your business too far
Although you may be keen to expand or scale your business fast, however, you should ensure that you do it in a sensible manner. If you exceed the limits of your business it’s likely that a large portion of your cash will end up held in operating and capital costs which will make your company less flexible in the short run.
If you want to stay clear of having to tackle issues with cash flow due to overextension, make sure you are sure to plan your growth thoroughly ahead of time. Don’t just invest and be hopeful. Regularly reviewing your most important financial statements frequently–cash balance sheet, flow statements, and balance sheet — will allow you to gain a better understanding of the state of your business and where it’s going.
4. Your sales are declining
The economy might be struggling. You might be facing plenty of rivals. Whichever the reason in the event that sales have been declining steadily in the last few months, there’s an excellent likelihood that your profit margins are being cut thin, and as thin as they can be if they even exist.
Since your overhead expenses probably will not change, falling sales could suggest that cash flow issues could be imminent. To counter declining sales, you may want to alter your strategy or at the very least, your expense budget.
From there, take at it a bit more closely:
Where do your losses come from? Are there any particular customers to which you’re not selling as much as you did before?
Is there a technological or process-related issue? Are your sales pages on your site broken? Are your customers who visit you in person dissatisfied with the customer service?
Are there macro-level shifts that are taking place in your field currently that affect the benchmarks you use to measure your business?
How long was it since the last time you revised your buyer personas, or thought about updating your messaging?
Does your business model work?
Are you experiencing a seasonal change?
If sales drop for a couple of months it is possible that you don’t have any major issues to resolve. However, it’s a good time to make sure that you have a plan when you begin to notice an ongoing trend. Reduce risks by being aware of them at first, and developing a plan for resolving them.
5. Your business isn’t making any money.
At the end of the day If you’re spending more than you’re earning It shouldn’t require a genius to inform you that you’ll likely face cash flow issues at some point or another.
If you’re in this situation you may want to look at your business’s model to determine how it could be improved to increase profits. Also, it could be time to consider whether it’s a good idea to increase the price of your products.
Seeing one of these signs in your company doesn’t mean it’s an immediate issue. Make sure to take the time to examine carefully the financial performance of your business and ensure you’re looking ahead to the future so that you are able to take out a loan or a credit line if you’re in the middle of the edge of a more difficult time.
Increase your cash flow
However, even after a thorough planning process and identifying the causes, you might still be needing to dramatically increase your cash flow. It could be due to an unintentional financial error or economic downturn or any different reasons.
If you are looking for fast and effective ways to boost your liquidity, take a look at our article on how to improve your cash flow to begin.