When it comes to financial success and stability of any company, the most important factor is, in fact, cash flow. Cash is the most important, as well as the most liquid asset a company can have. No matter if you’re running a startup, a small business or an enterprise company, without positive cash flow you’ll experience major financial issues.
But what exactly is cash flow? Simply put, cash flow is the amount of money flowing into your company, as well as the amount of money flowing out of it. If you have more money flowing in via accounts receivable than you have flowing out via accounts payable, your company has a positive cash flow and if it’s the other way around, it has a negative one.
In addition, many people confuse profits with cash. As a matter of fact, profit is an accounting term representing activities that help your business earn money whereas cash is the amount of money your company has in its business checking account. What you may earn and what you actually have are two different things. That being said, here are a few strategies to protect your business from cash flow downturns.
One of the major financial pitfalls for any business is debt. Having an outstanding debt or even worse, multiple outstanding debts can hurt your cash flow in more ways than one. The longer you have a debt the more your expenses will increase. The main reason is that excess fees and interest rates go toe to toe with debt. For example, missed and late bill payments result in late fees and high interest rates. In addition, improper tax filing can result in missed deductibles, as well as tax returns, not to mention, legal issues.
In order to avoid this cash flow downturn altogether, consider consolidating your debts. In other words, consider taking a loan that will cover all the smaller debts you have and consolidate them into a single but larger debt. This may seem pointless but you must also consider the fact that debt consolidation loans have more favorable pay off terms and conditions, as well as more favorable pay off periods. Simply put, consolidated debt is much easier to manage and thus much easier to pay off.
Manage your incoming payments
As mentioned before, profits aren’t the same as having cash on-hand. Your company can have good profits and revenue but still lack the cash to maintain its business operations. Simply put, you can easily go bankrupt without cash even though your company is generating both profits and revenue. The best example of that scenario is invoice payments. As you may already know, invoices can take anywhere between 30 and 120 days until they’re due.
However, during that time your company must cover expenses, such as taxes, bills, salaries etc. The fact of the matter is that you cannot cover such expenses without cash. If your company is experiencing issues with late or missed payments from clients or customers, you can always consult with direct debit companies to automate your invoicing and collect payments on a recurring basis. That way you can also track and automatically re-bill failed payments in order to ensure a positive cash flow.
Reduce your expenses
How companies spend their money will also affect their cash flow. Everyone is well-aware that expenses and costs are regular aspects of any business operation. However, such expenses don’t necessarily have to be too extensive. If you can manage your spending and reduce the additional expenses and costs your company must pay regularly, you can also avoid hurting your cash flow. As an example, operating costs are always present within a company. Still, that doesn’t mean you can’t reduce them to maximize profits and minimize expenses.
Operating costs, such as manufacturing, labor, marketing and so on, can be reduced without sacrificing business efficiency or product quality. For instance, you can negotiate better deals with suppliers and manufacturers. Moreover, you can outsource some of the business operations to lower labor expenses. Another type of mandatory costs is overhead costs. These expenses do not yield a return on investment but are nonetheless necessary. Expenses, such as rent, bills, utility, maintenance, taxes, travel expenses etc. count as overhead costs, but you can reduce those as well, in order to improve your company’s cash flow.
Consider raising prices
Product or service pricing is always tricky in the business world. If your prices are too high you may lose customers. On the other hand, if your prices are too low, your business may not be profitable. Therefore, getting the prices just right is essential. However, changing prices, especially rising them, may be an option to improve your cash flow. This process is more seamless if your competitors have been raising their prices as well.
But, if you decide to raise prices without a viable reason other than improving your business profitability and improving your cash flow, you must implement the right strategy. The main reason many businesses avoid being the first to take action is the possibility of losing too many customers. Although losing customers is a strong possibility, the majority of customers will adapt to new prices regardless. There are various methods you can leverage to ensure higher price integration goes well with the customers. However, you’ll have to test various ideas to determine the best course of action.
Marinating a positive cash flow is crucial for any company. In most cases, ensuring a positive cash flow comes down to proper financial management but it’s also important to avoid common cash flow downturns. This task doesn’t have to be difficult if you take the time to analyze your business finances on a regular basis.