There isn’t any business that doesn’t need cash. As a small business owner, you must be aware of the significance of having an adequate amount of rupees in hand. Irrespective of the profits your business is making, if the cash is occupied in any way, be it pending receivables or excessive inventory, the money is worthless. In contrast, when you maintain a strong cash flow for your business, it lets you fulfill your financial duties effortlessly and the resilience it needs to rise with more opportunities. In short, you won’t have to think before saying YES to any new venture that comes in your way.
A Cash flow is basically the money that comes in and goes out of your business for various business motives at a given time. If you’re maintaining a proper cash flow, the money you’ll be getting from your business (through funds or sales) would be more than what’s going out (costs like rent, inventory and payroll etc). In this regard, a cash flow statement helps you track down your cash flow.
It is often said that cash is the quintessence for any business project. Having said that, if your capital or cash is inaccessible or you’re short of rupees to spend on expenses then there might be some major problems coming your way soon. In this regard, cash flow is considered an essential gauge in the field of business management. It helps in computing the net change in the total money occupied by your business during a particular time period as in yearly, quarterly or monthly. Thus, a cash flow statement gives you a clear picture of this net change on account of the outflow and inflow taking place in your business. To sum up, if your business is making more money than what it is spending, then the cash flow is positive ; however, if it is the other way around then your cash flow is negative. For instance; if you earned Rs.200,000 this month and your expenses were Rs.80,000, then your cash flow is positive. On the contrary, if your earning was Rs.80,000 and your expenses were Rs.200,000, then it is definitely a negative cash flow.
Now, that you have learned the significance of maintaining a positive cash flow; here are some amazing tips for you to implement it successfully:
This sequence is the time taken to buy a raw material, develop it into an item, sell the item and then eventually get the payment. If you’re a business owner in Pakistan and understand your cash flow sequence then you should know how to reply to these two questions confidently whenever asked; the present situation of your business cash as well as the future situation i.e. where was it the last month and now where would it be next. You can answer these two questions easily by maintaining your profit and loss plus balance sheet statements accurately and going through them on a regular basis. This will help you in understanding your cash flow sequence and fixing out any sort of irregularities in it. For instance, you can pay your supplier’s Rs.100,000 bill later and collect your due payment of Rs.350,000 from your customer earlier.
Timely payments are always a plus for any business. When you get your payments on time, only then you can maintain a positive cash flow and deal with your expenses accordingly. You should learn to emphasize on getting your payments on time. Remind your clients to pay timely by sending automatic emails every ten, three and one day before your payment is expected. Phone calls and messages can also help in this regard.
As a small business owner, you must know that excessive inventory will only block your cash and then, you won’t have enough money to spend on your expenses. For instance, a book store owner in Karachi spends Rs.800,000 every year to buy books. If he makes two big book purchases in a year for Rs.400,000 each, then this amount will be blocked until all those books get sold out. However, if he makes four purchases in a year then only Rs.200,000 would be tied up at a time resulting in more free cash that can help him in other business activities.
Discussions and meetings with your customers and vendors are really helpful in keeping up your cash flow positive. Discuss payment terms with your clients. For instance, if a client is purchasing a big order but requests a 90 days payment term (a usual payment time in Pakistan), you can ask for an early payment. On the other hand, if you’re buying a raw material from a vendor which will take weeks to turn into the product you have to deliver then request a payment time with your vendor that matches with the one with your client so that you can never lose grip on your cash flow. Having good relations with your customers and vendors will help you make them agree to your terms conveniently.
For staying updated about your financial activities; you should go for accounting software like LedgerMax that is especially designed to help its users keep track of and manage their cash flow positively. LedgerMax is a complete accounting software that offers amazing cash flow handling features for small to medium sized enterprises. It helps you in monitoring a precise record of your inflow and outflow, and also the estimated cash flow, tells you how strong your business is.
To sum up, maintaining a positive cash flow is a key to any successful business in Pakistan. A strong cash flow is a prominent sign of the financial stability and strength of a business. This denotes that your business is generating a lot more money as compared to its expenses. However, reaching such a point is not an overnight process; though, we believe these five tips discussed above will help you reach your goals eventually.