Maintaining a Positive Cash Flow and Why It Is Important for Your Business
One of the most important parameters of your business’ health is its liquidity, which comes down to the amount of cash you have on your hands at all times. Insufficient cash flow is something that can hurt your company severely, as 60% of failed businesses report that their collapse was due to some kind of cash flow problems. In general, the liquidity of an asset or its security is determined by its potential to be traded quickly without losing value. In this sense, cash is the most liquid asset, while a car or real estate are less liquid since you can’t trade them right away without being forced to lower their price. Now let’s see what liquidity means for your company and how to maintain it at a satisfactory level.
The importance of liquidity
When it comes to particular businesses, they are considered liquid if they have enough cash at their disposal to effectively cover all their liabilities in the forthcoming period. Note that the fact that you’re making profit doesn’t necessarily mean your company is liquid. In accrual accounting, as soon as the invoice is sent, the amount of money you are owed is calculated as income. However, this is usually not the point in time when the money is actually transferred to your account. Why is this discrepancy important?
The fact is, you can’t pay the bills, taxes, goods or raw material with invoices. You can use only cash. So, to keep your business running and your liabilities under control, you need to find the way to maintain a positive cash flow. A lack of liquidity can damage your credit rating as well, since you might find yourself unable to pay out your loans. Furthermore, having money on your hands enables you to make smart strategic moves whenever an opportunity arises. For instance, you can take advantage of discounts or special offers that last for a limited amount of time and thus save money, but that’s impossible without being able to pay for those things right away.
Liquidity is also very important for seasonal businesses and new businesses. Neither of these have time to lose, and need every dime they can get their hands on in order to keep the business rolling.
Maintaining the cash flow
To maintain a positive cash flow, it’s necessary to always have a plan. When planning to give out discounts to your customers, make sure you know exactly how it will affect your balance. The actual cost of your offer and profit margins should be calculated in detail. It’s useful to try cash accounting, which takes into account only the transactions made in cash and provides you with valuable info regarding the liquidity of your business.
However, your financial plan can’t be perfectly designed and you can’t predict all the factors. Therefore, you might end up deep in trouble anyway. Loans are the easiest way to inject some cash into your company, but this should be your last resort. First, you should try to get the money from your debtors, and avoid making new ones. There are a few ways to do this.
One of the things you could try is recurring payment. You can give your customers an option to subscribe to your service and pay periodically, usually on a monthly level, instead of paying for everything up front. This flexible paying system will make people more eager to use your service. It will do good things for you as well, since you’ll get a regular and stable cash injection you can count on every month. You can use recurring payment platforms that automatize the whole process and leave you with more time to deal with your business.
Another way is factoring. Factoring firms will buy your accounts receivable right away, in return for a small percentage of the money you’re owed. A factoring company basically “buys” your future income and then proceeds to deal with the original debtor.
Instead of maximizing cash flow, you can also try minimizing your liabilities. A uselessly large inventory or an unnecessary excess of employees should be avoided at all times. Cut your regular expenses whenever you can and always try to get an extra few days to pay what you’re due.
Of course, if your business is not doing well, no trick can help you maximize your cash flow. But if your business is generally healthy, then liquidity is all about good planning, balancing ongoing expenses and making sure you get the money you’re owed in time. This is something you ought to be doing regularly and systematically, making it a routine part of your business.
Jolene Rutheford is a marketing specialist- turned blogger, currently writing quality content for Technivorz. She is interested in and passionate about media and social media, digital marketing, psychology and much more. Jolene loves coffee, jazz, dystopian and fantasy movies.
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