Why cash flow planning is important for you?
Cash flow planning is important in startups
Cash flow is the lifeline for any business establishment. While larger companies have a financial cushion to bypass cash flow constraints to a certain extent, a blockage of proper cash flow could mean a death kneel for small companies especially startups and MSMEs who usually operate on a shoe string budget. A poorly managed cash flow system can lead the company to a dead end much quicker than anticipated.
A common mistake most companies commit is the lack of importance given to proper cash flow mechanism. Let us look at various aspects of cash flow mechanism and its significance especially for MSME sector.
Understanding cash flow management:
Just as in the human body when blood get clogged in arteries leading to disease, a blockage of cash flow in business streamline can lead to serious problems affecting the health of the underlying business entity.
The best way to avoid being in such a situation is to have a clearly defined cash flow policy. While sales may increase on paper, the extension of credit means cash flow coming in is far too low compared to outgoing expenses leading to an enormous cash flow misbalance.
A cash flow policy must be put in place during the good times when the business is doing well in order to maintain a long term cash flow facilitation process. Companies with poor cash flow mechanism often tend to pile up their inventory, offering far too much leverage for clients in terms of credit in order to increase sales.
Ways to improve cash flow management:
Focus must be maintained to make sure that cash flow to the company does not suffer unnecessary leading to an emergency of cash blockage. Companies should always have enough liquidity for it to stay afloat for a substantial period of time even in case of cash defaults by buyers. Let us take a look at some ways small and medium enterprises can improve their company’s cash flow mechanism.
Monitor cash flow weekly:
Many companies operate with a single focus on improving sales but keep on neglecting the cash flow aspects of the sales. While the sales may be increasing in the balance sheet, the non existence of adequate cash flows may do more harm to the company’s growth prospects than good. Make sure your company has a weekly cash flow monitoring system in place where credit cycles of customers are planned in such a way that there is incoming cash flow every week. Rather than receiving al cash at the end of the month, it is better to offer a plan where there is regular inflow of cash each week.
Offer Cash Discounts to Customers:
This day and age of recession and slowdown of global economies has meant increase in credit cycles. Credit cycles which were once limited to 10-15 day period have now been extended for up to 90 days. While credit cycles can help improve sales, they are directly responsible for cash flow blockages. Instead of offering credit, make sure you offer your buyers a cash discount in case they pay upfront instantly. A cash discount may mean lowering of one’s profits but it is far better than facing payment defaults and cash flow blocks.
Manage Inventory Smartly:
The crux of better cash flow management must include a complete overhaul of inventory management. Companies especially MSMEs need to revisit their purchase policy especially while working with multiple vendors for better inventory management. Instead of holding additional stock for future use, companies are better off attaining an equilibrium managing sales with cash flow and inventory management to ensure proper functioning of the business.
Only a few companies understand the significance of having a well planned cash flow system. Others only understand the significance of having a cash flow system when they are faced with a cash blockage and mostly it is often too late by that time to plan a rectification process.
Do you plan your financial transactions in a similar way? Please share with us.