10 Principles to Maintain a Healthy Cash Flow in Business

Cash flow is crucial and the most tricky part of the business. Ignoring it can make your business hit the rock bottom. However. people who can grab the pulse of the cash flow can propel unprecedented growth in business.

There have been several cases where businesses had to shut doors despite having every other aspect of the business perfectly managed, only because they could not manage the cash flow of their businesses.

Also, there are businesses that apparently seem to be doing well till the time you check their cash flow. What is cash flow? Well, how does cash/ money move in and out of business? That is what is referred to as cash flow. The money that you earn through your business and the money that you spend for running your business.

There are several avenues for inflow of the cash. You can generate an inflow of cash from your customers through sales. Also, you can ensure cash flow by selling your assets or taking loans.

Similarly, the avenues of outflow of the cash are through salaries of the employees, business associates, loan payments, establishment cost of your business, and operation cost.

While the cash that flows in through your customer is a good indicator, the other two options that include selling assets and loans are not desirable. Also, the cash that is generated by the sale of your product or services should weigh out the outflow of your cash. Only then you can say that your business is sailing smoothly.

In this article, we will learn some fundamental principles to master the cash flow management of your business. So let’s get started.

1. Financial Knowledge

The very first reason for any financial debacle is the lack of financial knowledge. In fact, the correct word is acumen. Financial acumen comes from practising the right financial ethics in your business. It is to know what will fuel growth for your business. Consider taking a course on business finance. Make friends with accountants and learn how they make their financial decisions in life and also at work.

2. Incentivise Early Payment

Payments at the right time from customers and stakeholders are extremely significant for business. Hence, you should find out ways to motivate your customers to make payments at the right time. Refrain from giving out your product or services in credit. Rather give discounts for payments that are made before time.

3. Conduct a regular Credit Check

Remember the cash flow that is good for the health of your business is the one that ensures profit. Make a habit of getting the money for your services at the right time. If you have a lot of credit backlogs, make sure to recover them as soon as possible. The longer your money stays in the hands of your customers or business associates, you lose out interest from the money that you could have earned from the bank. Further, if you don’t take cash for the products you sold, you will have to take loans or sell out your assets to generate an inflow of cash for running the business. And the last option is not at all desirable.

4. Pricing

The best mantra to ensure profitable cash flow in your business is to do your pricing right. There are several instances to prove that both overpricing as well as underpricing are detrimental to business growth. There are several factors that help to get the pricing right. It includes knowing your customers, doing a market survey in your area of operation, etc. Learn how to make your pricing right and execute it flawlessly.

5. Be diligent with legalities and keep a record

If you really want to develop a strong base for your business and make it grow, you should practice paying your taxes on time. Also be very diligent with the invoices, bills, and every single paper that help you to track the inflow and outflow of your cash.

6. Use online transactions

Online transaction is convenient, secure and easy for documentation purposes. And with several money transfer applications operating in a smooth and secure manner, cash transactions are increasingly becoming a thing of the past. Hence, use all the upgraded technologies to maintain records of the income and expenditure of your business.

7. Choose the Financing options with care

Though bank loans are perhaps the most convenient and easy go-to option for your business. However, that is because it is advertised by the banks. However, there are several other options that include government grants, venture capitalists, IPO, etc, Pick the best option depending on the stage of your business and its future goals.  

8. Know your rights as a business owner

Are you a start-up? Or a second-generation business owner? Do you know whether your business falls under the category of an MSME or an SME? If you don’t know it yet, consult a financial or a legal adviser to find that out.

Make sure your business is registered and all the paper works are complete. It is a pity that a substantial segment of the business community still falls under the unorganised sector. These business owners believe themselves to be smart because they are not paying the taxes. However, in the process, they deprive themselves of all the benefits that they can enjoy as registered businesses.

9. Work on your product/ service

As you become financially aware of your business and conform to all applicable protocols, also keep enhancing the product or service that you offer. Expect your customers and business associates to stick to you only if your product/ service satisfies them. Money of your customers is the only profitable cash that flows into your business. Hence, make sure that it gets a compounded increment.

10. Track your operations for cash unnecessary outflow

The secret of good financial management of a business lies in its operations. Even very small and unplanned processes lead to unnecessary time and money loss. Track your business processes to know whether they are efficiently using the time and resources invested in them or misusing them. Deploy the right governance infrastructure to make sure that your resources are utilised properly and are giving the expected returns.

Thus we come to the end of discussing the best practices to maintain a healthy cash flow in the business. Do you have any stories about cash flow management that you would like to share with us? Do let us know in the comments below.

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FAQs

Q. How to identify cash flow issues in your business?

Ans. You don’t have to wait to hit the rock bottom to know that your cash flow is not well managed. Your business gives you early signs that your business is heading towards a cash flow problem. You can identify it if you are a little observant towards the following -

• Do you have too many short-term debts?
• Are you receiving your payments on time and consistently?
• Are you getting discounts for early payments or not?
• You have your inventory full but the sales side is not as encouraging?

Q. Why is cash flow important for businesses?

Ans. Cash flow helps to carry out the expenses in the business. Sometimes even the best of business ideas backed with a good investment fail if the cash flow of the business crumbles. If the cash flow of the business is managed well, it indicated ‘all is well for the business.

Q. How many businesses fail due to cash flow problems?

Ans. As per industry reports, as good as 82% of small businesses fail due to cash flow problems.

Q. How to improve cash flow?

Ans. The best advice to improve cash flow is to make sure that all your invoices (whether they are payable or receivable) are cleared on time and documented. Learn to identify the hidden factors that are depleting your resources. Consult financial advisors to learn about ways to improve the cash flow of your business.