Every business, even those with healthy account books, will suffer from business cash flow challenges from time to time. Keeping a close eye on your business finances can help a business owner to spot potential difficulties and make arrangements to present them from getting out of hand. We need to study cash flow forecasting to understand why some of the best businesses, even expanding ones, can suffer from cash flow gaps. This will help business owners recognise early warning signs that will alert them of the fact that our customers may be in difficulty.
Cash flow management
Cash flow management is an integral part of any business process. It helps to keep any business viable and helps to complete all the work a business has undertaken. Simply put, cash flow is the money that is coming in and going out of any business. This includes monitoring what the business creditors owe the business and chase them to get the dues regularly. Business owners also need to monitor expenses by using cash flow forecasts or projections.
Spotting cash flow gaps allows business owners to plan ahead. You could push for more sales, chase payments that are due or even consider borrowing some money to cover a cash flow gap.
What kinds of problems typically affect cash flow?
One of the main problems that lead to cash flow problems includes a whole lot of payments becoming due simultaneously. Perhaps the business owner is finding it very difficult to pay the bills or pay for supplies. This will lead to the business not being able to stock up or is struggling to fulfil orders. Times during business growth will also make a lot of demands for cash. Think for example, what had to be done if the business suddenly got an extremely big order. Would the business need extra staff, buy new equipment or perhaps even move to larger premises. These are just a few of the typical problem cash flow troubles in a business can compound.
How cash flow forecasts help
A cash flow forecast, or projection, shows what the business is currently spending and what it is hoping to earn in the future. It is up to the business manager to update these figures on a weekly or a monthly basis. By updating the figures regularly business owners will be able to recognise any variances and also to figure out what has caused them. For instance, have the variances been caused by a seasonal peak or dip, or is it something happening in the wider economy?
Sometimes an increase in essential commodities such as fuel or groceries will lead to consumers tightening their purse strings and will lead to lesser buying. Sometimes new products in the market can also lead to a slow down in sales of an existing business.
Spot cash flow problems before they affect sales
Monitoring payments received will help you spot changes in customer payment patterns. Contact a customer for payment after a predetermined number of days after invoicing. If a customer who pays regularly after 30 days of invoicing begins to pay 45 or 60 days after invoicing, it may be a sign that something has changed for them. You should politely remind them of your payment terms and explore the possibility of a different payment method suiting them better. Suggest a two stage payment instead of a single final payment. Not only will this help your cash flow but it will reduce your risk as well. Try asking for part payments up front, offering credit card payments and online payments to ensure your payments are made in time.
For cash flow issues where customer invoices are insufficient in helping the problem and a solution is required immediately, you can resort to business short term loans from banks or private lenders. Although this can incur high interest rates and will only help as a temporary solution, it can nonetheless be a great aid to your problems. Your cash flow issue could potentially cost you a huge client, and under these circumstances a temporary cash finance fund from the lenders can be very beneficial.
If the cash flow of a business is healthy, the business will be healthy. After all, everyone is in business to earn money and a slow down in cash flow will eventually lead to a slow down in earnings, which if sustained over an extended period of time, will lead to the business closing down.