Written by: Nikunj Aggarwal
CASH FLOW is an important yet an undermined component of success for a small or mid-sized business. Cash flow is basically the movement of funds in and out of the business, representing the financial rhythm that sustains operations, growth, and overall stability.
So, what does a Cash flow analysis do for a Company? A cash flow analysis determines a company’s working capital — the amount of money available to run business operations and complete transactions. Managing the company means managing its Cash flow.
If we look into various studies over the years, it found that cash flow problems can be one of the leading causes of failure for businesses, because the amount of cash coming in doesn’t compare with the amount of cash going out.
Components of Cash Flow
Understanding Cash flow involves dissecting it into three main components:
1. Operating Activities: This includes cash inflows and outflows directly related to the core business operations. Inflows may come from customer payments, while outflows could be supplier payments or operating expenses.
2. Investing Activities: Cash flows here involve buying or selling assets, investments, or other businesses. Inflows might result from selling a property, while outflows can stem from purchasing equipment.
3. Financing Activities: These activities deal with cash inflows and outflows related to the business’s capital structure. Inflows include loans and investments, while outflows can involve paying dividends or repurchasing stock.
Cash is precisely measurable, tangible, and absolute. Without cash, profits are meaningless. Many a profitable business on paper have ended up in bankruptcy without positive Cash flow.
Here are some basic principles of Cash Flow Management, which involves:
1. Monitoring, analysing, and optimising the net amount of cash receipts minus cash expenses.
2. Knowing when, where, and how your cash needs will occur.
3. Knowing the best sources for meeting additional cash needs.
4. Being prepared to meet these needs when they occur.
So, the question is: — Why is Cash flow analysis required?
1. It helps in avoiding cash shortages, caused by having a gap between cash inflows and outflows.
2. It helps in budgeting your cash flow and in a way helps to control the business expenses, setting targets for your sales and sales realisation.
3. Helps with managing limited cash/resources effectively.
4. Facilitates planning for timely debt repayment.
5. With resources available, timely investments can be made.
6. Facilitates easy negotiation of financing terms with lenders.
7. An investor gets a clear picture of how much cash a company generates and gain a solid understanding of the financial well-being of a company.
8. Helps to develop short-term cash flow projections to help the business owners to manage daily cash.
One of the important goals of cash management is to reduce or eliminate uncertainties when meeting working capital requirements.
Here are few tips and tricks that could lead to better management of heathy cashflows, especially for a company like WadzPay:
#1. Spend Control
The main aim of any business is to make a profit and become a successfully commercial entity. To achieve this, you need to focus on cash-flow and spending.
Try to minimise expenditure by prioritising between what’s necessary and what you want, on everything from office space to the number of software subscriptions.
This can be easily managed by adopting a good spend control platform, which will bring automation, cyber security and remove human error from the spend control equation.
#2 Get Money You’re Owed As Soon As Possible
Collect your receivables on an immediate basis. As a start-up, eager to please, don’t let customers get away with paying late. Regular customer follow-up will ensure healthy cash flow.
#3 Don’t Bite Off More Than You Can Chew
Timing is the essence of Cash Flow Management. Big projects are highly lucrative for most start-ups, but the theory of saying yes and figuring out what to do later can land you in serious trouble. Think long and hard before accepting any assignment that may put a burden on your cash flow.
#4 Get Tech In
Managing cash flow in spreadsheets is a stop gap arrangement which will have to eventually give way to a sophisticated system which will keep a Company’s financial data secure and enable to gain access to information from anywhere, at any time.
Bringing in technology will help with everything from controlling cash to accounting reconciliation to cross-currency purchase control and supplier management.
This is where Blockchain technology for Cash Flow Management comes into picture. It can facilitate streamlining the entire process of sending invoices and receiving payments. Transactions that occur on Blockchain are time stamped and cannot be tampered with, hence chances of errors and disputes are greatly reduced.
Thus, a technology solution such as Blockchain is vital to enhance a business’ performance, by eliminating duplicate invoices, billing error, reduce processing time and increase cash flow visibility.
In the business world, Cash flow isn’t just about numbers; it’s a reflection of a company’s financial health and resilience. Businesses that proactively manage their cash flow are better equipped to navigate challenges, seize opportunities, and thrive in an ever-evolving market. By understanding the components, practicing effective strategies, and fostering a culture of financial prudence, companies can ensure a steady, reliable, and optimized cash flow that paves the way for sustainable success.
Most important rule: — KEEP YOUR EYE ON THE CASH, NOT ON RECORDED PROFITS. HAPPINESS IS POSITIVE CASH FLOW.