Cash Flow, an important key factor for every business but more critical for startups to manage. If you cannot manage the cash flow in the initial stage of the business, you will likely to wind up your business.
A business without cash flow management is like a boat without an oar. Even if you get succeeded in the business, it will be an upstream exercise guaranteed to wear you out.
Cash flow, the lifeblood of your business is the amount of money coming in and going out of the business. Businesses can only compete if they have the financial information and the best people to make decisions based on that information.
Cash flow refers the change in the cash position of the business. A positive cash flow is important for your business survival. Explore the history and sound financial data of the business and project the future cash flows. It may take the guesswork out of it.
The major sources of cash flow are receipt of a loan, payments from customers, investments, interest from savings and infusion from investors.
Why is good cash flow important? Is it more important than profitability?
Business never collapsed because of lack of profitability, but many have gone under because they lacked cash. No business can survive without enough cash to meet its immediate needs. Cash flow is vitally important for the growth of the business.
'Revenue is vanity, cash flow is sanity, but cash is king', it's important to have large inflows of revenue, but it is more important to focus on cash flow.
Growth- The investment capabilities of a business depends on the strong positive cash flow. With these investments, your business can grow and consequently get a position of excess cash flow.
Cash is king- Cash is different from cash position, but both are used to evaluate the financial health of a company. The phrase 'cash is king' refers the ability of business to have the enough cash to meet the short-term operations.
Flexibility- The strong cash flow provides the great flexibility to make the critical decisions. It gives the freedom to focus on other operations. Cash flow allows you to disperse cash by repaying the debts, invest in research or buy more assets.
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Keys to Managing Cash Flow
Management of cash flow is important for survival and long term well being of the business. Cash flow management is driven by two things; organising and planning.
The following steps are recommended to better manage cash flow, especially for growing business:
- Determine the breakeven point, to know when your business will become profitable. It gives you an early goal for projecting future cash flow. The breakeven level does not affect your cash flow, but it will let you know the moment for your first profit.
- Do not focus on profit, instead focus on cash flow management. It might sound contradictory. Use the breakeven point as a benchmark and after reaching to that level, your business at the profitable position but you still need to manage the cash flow.
- Maintaining cash reserves is cognate to maintaining a personal savings account. Cash reserve would help you from the stress about the cash shortfalls. The reason to maintain the cash reserve is to meet the needs of short-term and emergency funding.
- Diversify revenue streams, the foremost thing for managing the cash flow of any business. Do not rely on a single source of revenue to run your business. Revenue diversity will help you in the case of dries up of the revenue source.
- Always keep buffer money once you find the breakeven point. Your business must have enough money to fund the needs of the business for a rainy day.
- Get a grip on cash flow forecast which starts with the habit of writing the accounting records accurately and regularly. These records allow the business to know the monetary position of the company.
The author is affiliated with QuickCompany which deals in Company Registration, Trademark Registration in India, Company Search, Trademark Search and Other Legal Activities.
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