You need to learn two important things to run a business effectively: Cash Flow and Profitability.
Businesses need to properly manage cash flow as it determines the company’s ability to create value for stockholders. Operating your company without a cash flow is like boarding a plane without checking the destination first. You’ll end up in a situation without knowing how you got there.
An effective cash flow management system will allow your business to be transparent with your shareholders and better keep track of where your company’s money goes. When you can better manage your money, you can forecast and think of ways to generate even more profit.
Read on to know more about cash flow management and how to increase profitability. These are the tips for you:
1. Internalize that profit is different from cash flow
While these things seemingly go hand in hand, they are different accounts. Your cash flow essentially follows your transactions in cash and cash equivalents, while your profit is simply all your revenues minus all expenses. You cannot determine your cash flow by merely looking at your profit and loss statement, nor can you extrapolate your profit or income by simply looking at your cash flow alone.
You must always look at both your cash flows and statements of profit and loss. Your cash flows will tell you WHERE your money is coming from and where it is going. Your profit and loss statement, on the other hand, tells you how much your business earned or lost over a certain period.
2. Liquidate unused inventory or equipment
In business, it is important to maximize all your resources. If you can’t finish your inventory or have piles of unused equipment, liquidate these items as soon as possible. Though these items are not cash or cash equivalents, they still hold a money-equivalent value. Over time, this value decreases due to depreciation.
If your equipment hasn’t been used in the past 9 months or past year and you can no longer find a use for it, let go and sell. Should you have inventory that you know will phase out in the coming years or will no longer be sellable, liquidate these items as soon as possible. It is better to sell these items for a small to medium-sized gain over keeping them and incurring bigger losses down the line.
3. Expand your market, add new products or services, and increase sales
The most immediate way to increase positive cash flow and bolster revenue is to find an additional income source. This may be adding a new service to your company or a new product line. In doing so, you expand your market by catering to more clients with broader products that fit more people’s needs, thus boosting your sales.
4. Plan your payments accordingly
The most basic aspect of cash flow is managing cash outflow. This means properly managing supplier payments. Often, suppliers offer deals, discounts, and even freebies for companies that make bulk orders ahead of time with early payments. Always be up to date with your suppliers so that you can plan and avail of these deals.
Coming up with a payment strategy earlier on instead of cramming will also give you leeway to make negotiations. It is helpful to come up with a payment schedule or calendar to keep track of due dates. Remember, late payments not only affect your cash flow and profit as they come with penalties, but they also have adverse effects on your brand image.
5. Keep a lean operation
If you want to have greater cash inflow, less outflow, and more profit, evaluate your financial statements. You may be spending more on operations than you actually need to. This may seem minuscule if the additional unnecessary expense is a couple of hundred pesos a month, but this amount compounds over time. It is important to keep operations lean. Avoid hiring new employees, opening a bigger office, or making a big investment if it is not necessary. Always weigh the pros and cons of each decision as they will impact your business. Ask, “What’s more important…new business car, or larger profits and a positive cash flow?
6. Encourage your customers to pay on time
One negative factor that affects cash flow is the late payments of customers. For larger purchases, it may take 30 to 90 days for a customer to complete payments. As much as possible, encourage your customers to pay early or on time. You can do so by implementing late payment penalties, making weekly reminders, or making early payment incentives like discount coupons.
Final Wrap Up
If you want your business to stay in tip-top financial health, you need to take a good look at your cash flow and profit and loss statements. Staying on top of these details means you can make sound decisions that impact your business. Should you need help ironing out these numbers, give us a call. We give free 30-minute consultations.