TAX BASICS

Did you Know the most important factor for a successful business?

Most entrepreneurs think that profit is the key to success. But what if I told you they are wrong. Profit is an essential stat for the success of the organization and there is no arguing that fact. But for a business to run effortlessly cash flow is a must. Imagine you have orders to fulfill and you need to purchase raw materials for your production and you don’t have the cash to fund the purchase, you won’t be able to fulfill the orders and you won’t generate any profit. Yes, all entrepreneurs work hard to earn profit but understanding the importance and mastering to operate according to the situation boosts your chance of success.

Do you ever struggle to cover your expenses because you don’t have enough cash? Understanding “what is cash flow?” is a great start. Many small business owners experience the same problem: They suffer from poor cash flow caused by factors like insufficient client work, slow-paying clients and large unplanned expenses.

Well, you would be thinking that a lot has been said about the importance of cash flow but what exactly is cash flow? And why is it so important? In this post, we would help you understand the importance and help you maintain the cash flow.

What Is Cash Flow?

Let us be clear cash flow has nothing to do with profit. Profit is the difference between revenue and expenses. A business can be unprofitable while having good cash flow and vice versa. This can happen, for example, when someone deposits their own money into a bank account or receiving cash from debtors will improve the flow of cash but not profits. 

Secondly, it is not working capital. The two are often used interchangeably, but working capital is current assets minus current liabilities. It is the money you can use to fund cash shortages.

So what exactly is cash flow?

It’s the total amount of money flowing in and out of your business. Changes in the flow of cash usually result from operating, financing and investing activities. Although operating activities of the business can often have the largest impact as it takes the most cash out of the business.

Why Does Cash Flow Matter?

The smooth functioning of your business. Just like an employee needs a salary to meet their expenses a business need cash to pay the bills and cover the day-to-day, or you are putting yourself at risk of shutting down. Your target is always to maintain positive cash flow and to earn more than you spend. 

Business Growth. Any business with the aspiration to grow will need cash in their business. Businesses will need funds to expand, purchase raw materials, equipment, advertising and so on all while covering costs.

Staying ahead of the game. Knowing your cash flow informs your decisions. For example, you want to purchase a new laptop to the office and by evaluating the cash flow and projecting the inflow as well as outflow you can make the adequate purchase with respect to the cash flow position.

Seasonal businesses. Seasonal business usually has marked slow and busy periods and unpredictable cash flow. They need to carefully manage their cash flow year-round, so they have enough cash to tide them over during the slow periods.

Efficient Cash Management. Understanding your cash flows helps you to understand and evaluate how you manage cash. Which business activities lead to an increase or decrease in cash flow. This would help you to budget your expenses and forecast accordingly. 

Five Ways to Boost Your Cash Flow

1. BECOME A MASTER OF YOUR BOOKS

Some small business owners face cash flow problems because of unorganized books. The sole traders or small business owners might not have the time and often end up making a huge mess in accounts. Maybe their invoices aren’t readily available in one location or they might be disorganized. They don’t track their expenses right until the tax period and then enter a race.

Regardless, this unorganized books means they are not sure of what is going on in their business or what is the position of the business. Nor how much they are earning or spending, whether they are profitable, and even how much money flows through the business. In some cases, this disorganization leads to overlooked invoices and large outstanding sums of money.

Are you facing such issues?

If so, its time to get your books into order, like we have been stressing you might also be aware of the importance of proper accounts and the importance of maintaining cash flow. There are numerous cloud accounting tools available or you can also provide the details to online accountants and let the experts take care of the rest.

2. GET INVOICES PAID FASTER

If late payment from clients is an issue for your business, then you’re not alone.  According to Fundbox, 64% of small business owners face late payment problems. This won’t be a huge problem if it happens rarely or you have enough clients and receivables to sustain.

But the scenario changes if late payment becomes a recurring theme and when you hit a low period, it can cause problems – with you unable to pay the bills and grow your business.

The solution is to get paid faster and use the right tools, so your finger remains on the pulse of those late payers. Here are several ways to get your invoices paid on time:

Send invoices promptly. The sooner you send invoices, the sooner you get paid.

Be courteous. Yes, it works, being polite in invoices improves the chances to get paid on time as it creates a lasting impression.

Ensure the payment terms are clear, so clients know when to pay you. Avoid ambiguous words like “net 30” and “upon receipt.” 

Create invoices that are free of common errors like address, date of issue, due date or any such errors. Make sure it’s properly done at the first and avoid recurring calls with your clients.

Send reminders just before the invoice due date. We are all humans and we forget things, even you might have forgotten many things in your life. It may be someone’s birthday or anniversary or even a credit card due date, but it happens. Even your clients might forget because they are also busy with their business. Sometimes they just need a gentle reminder.

And for overdue payments? Follow up with those clients and send late payment reminders. This why we urge you to keep proper accounts or else you might likely miss sending these remainders. By sending late remainders it increases the chance to run on a proper schedule and avoid those awkward money conversations.

3. GET A CASH ADVANCE ON UNPAID INVOICES

Late payment is sometimes unavoidable, especially when working with larger companies that adhere to strict policies—often paying their suppliers 30, 60 or even 90 days after receiving an invoice.

Since you are going to receive payment after a duration doesn’t mean your business is not going to operate, you need adequate cash flow to meet the expenses. Various factoring services can be utilized for advance payment when necessary. Even though there might be a charge but if you face severe cash flow issues it is a viable option.

4. REQUEST AN UPFRONT DEPOSIT

Deposits provide you cash and show the client interest and would lead to a fruitful relationship. A client who is willing to pay a deposit is far more likely to cover the rest of the invoice.

5. REDUCE YOUR MONTHLY EXPENSES

Finally, you can improve your cash flow by cutting monthly costs. Every business would have non-essential expenses that drain cash. Be smart and cut those expenses. 

Cut unnecessary subscription costs. We all have monthly subscriptions we never use and keep for just in case moments. But those moments rarely arrive. Cancel those subscriptions and save money.

Negotiate your monthly bills. Yes, it is possible to negotiate your monthly bills with companies. It might be your cell phone bill or insurance, simply call those companies and tell them you are a loyal customer. Every one of your customers is important for your business its the same for every business. 

Conclusion

“Revenue is vanity, profit is sanity, but cash is king.” Most of us have heard this but unfortunately, some are unable to follow. Cash flow is the lifeblood of business. Its never too late, all of us make mistakes but what matters is how much we learn from those mistakes. This post was provided to help you understand the importance of cash flow, techniques that you can use to improve your cash flow and help you to prosper your business.

Sidharth Bharthan Menon
CEO, taxtotal​