What is Cash Flow
The money that comes in and out of a business is called cash flow. Now what is this coming in and going out, cash comes in when from customers when they are buying the products or services of a company. In the same way cash is going out when the firm makes its payments to their vendors or payments towards salaries, rent for the office structure, taxes paid etc.
If more money is coming into the company them is called positive cash flow so that the firm has enough money to pay its bill. If it is on the other side like more money is going out then the organization is in danger of becoming overdrawn at a point of time. It is for this purpose that the companies maintain something called Working Capital to run the day to day expenditure. This covers any shortage that might occur in cash flow.
Flow of cash must not be confused with profit. Profit is that part which the company gets over a period of time. Company’s especially small business must take certain steps to see that their cash flow is positive. Here are five important tips for small business to maintain their cash flow healthy.
Know the future: these businesses must forecast their cash flow requirement by keeping an eye on the economic indicators. It is advisable for them to prepare cash flow projections which will help them to know what changes need to be made for the year ahead.
Credit policy review and that of clients: organizing customer’s credit is very critical part of cash flow management. If any of the company’s clients have a history of slow payment, then it is wise for them to cut them off.
Speed up payment: the company must also take care to be prompt in its payments. The firm can keep a record like noting down the due dates for payments properly, overdue notices to be sent etc. This kind of record keeping will help the company in prompt payment to its vendors so that it also maintains the cash flow management properly.
Check if payments to vendors can be extended: the firm can make a check on the credit facilities that the vendors give them. Most of the vendors give 30 days’ credit for payment, the organization can check if they can be extended to 60 days’. So that the firm’s money line up can be maintained.
Amend contracts: since production is completely based on economic conditions, the firm may renegotiate the contract to see if it can be amended on certain terms. For example if petrol prices rises the firm can discuss the same in increasing the transportation costs according to meet the cash flow needs.
In spite of these entire tips one should remember that out flow of cash is not a problem. Getting money from clients on time and to sustain the same on normal basis is a complicated part of cash flow management. At any point of time the organization must see that it does not fall short of cash flow.