Written by Pooja 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, which needs to be tracked periodically.
Payments companies and digital currency companies like WadzPay are subjected to the same principles related to cash flow management.
Cash Flow Analysis
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, they’ve 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.
Types of Cash Flow
We need to focus on two kinds of cash flows here:
· Positive cash flow: This occurs when the cash coming into the business is more than the amount of the cash leaving the business. Profit does not equal cash flow, however a positive cash flow is needed to generate profits. Therefore, for any business to grow and make profit, a positive cash flow is essential.
· Negative cash flow: This occurs when the outflow of cash is greater than incoming cash. Negative cash flow spells trouble for a business, but there are steps you can take to remedy the situation and generate or collect more cash while maintaining or cutting expenses.
It’s important to remember — cash, however, is cash. It 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.
Principles of Cash Flow Management
Here are some basic principles of Cash Flow Management, which involves:
1. Monitoring, analysing, and optimising the net amount of cash receipts minus the 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 cash requirements.
Here are a few practical and effective suggestions that could lead to better management of heathy cashflow:
#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 (Using Blockchain for Cash Flow Management)
Managing cash flow in spreadsheets is a stop gap arrangement which will have to eventually give way to a sophisticated system which will keep your financial data secure and enable you to gain access to information from anywhere, at any time. Opening offices in different countries and managing multi-currency payments will become easy.
Bringing in technology will help you 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.
So, the ultimate rule for a company to grow and prosper is to realise that Cash flow management is essential and is a valuable measure of strength, profitability, and the long-term future outlook for a company without which the organisation perishes.
Most important rule: — KEEP YOUR EYE ON THE CASH, NOT ON RECORDED PROFITS. HAPPINESS IS POSITIVE CASH FLOW.
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