Starting a business isn't easy, but running it amidst the existing competition is even more difficult without proper accounting strategies.
Needless to say, cash flow management and accounting are the pillars of every entrepreneurial setup and without these insights in place it becomes extremely difficult to keep the venture up and running for long. While accounting keeps a track of all finances coming into the business or going out of the same, cash flow management is a critical aspect for startups as it enables them to sustain themselves in this extremely competitive global landscape. Most importantly, cash flow management also allows businesses to analyze their current positioning in regards to the existing financial hierarchy; thereby determining positive or negative flow of cash.
Accounting, in regard to business, is defined as the complex process of recording and analyzing the existing and upcoming financial transactions of the concerned organization. The entire process involves the likes of summarizing the cash flow, analyzing finances, and eventually reporting the same to the concerned authorities.
Cash flow management: the necessary aspects
The entire process of cash flow management starts with an analysis that determines whether the business is earning or losing money, which eventually determines the subsequent course of action. Therefore, in order to understand cash flow management in detail it is necessary to understand the components of cash flow analysis in detail.
Accounts Receivable: This aspect determines the amount and assets that clients and customers owe to the businesses, both in the long and short term.
Accounts Payable: This aspect determines the money or debt that is owed by the concerned firm to the suppliers
Shortfalls: This factor comes into the mix if the business owes more than the existing liability and there is a deficit in the existing calculations.
Most startups fail to ascertain the mentioned concepts and thereby end up incurring massive losses. For small and medium sized businesses, it is necessary to keep a close eye on the accounts receivable, accounts payable, and shortfalls, in order to make room for positive cash flow and eventually profits.
Cash flow management tips
Now that we have established and talked about the main components of cash flow analysis, it would be appropriate to shift the attention to the best strategies for efficient business accounting and cash flow management.
Determining the break even point
The first strategy towards efficient cash flow management is to determine the breakeven point of the concerned venture, via select breakeven analysis. Determining the same would allow the business to pin point the exact time when the venture would start becoming profitable. Moreover, breakeven analysis also makes sure that the grim combination of negative profits and negative cash flow is kept at bay. This strategy is a great way to initiate cash flow management as businesses can march ahead and plan things with an envisioned goal in mind.
The best approach towards determining the same is to calculate the fixed costs and pair the same with initial investments. Businesses can either opt for the dollar-based method or the unit based method, depending on the ease of calculation.
Concentrate on cash flow management more than profits
Instead of concentrating on profits, it is important for startups to keep focusing on the cash flow management even when the breakeven has been achieved. If the business cash flow is constantly increasing, profits will automatically start showing after a certain point of time. However, there are instances when profits slow down after a certain point of time after the concerned business has achieved the break-even. This is when it is necessary to strategize Cashflow in a different manner, either by increasing costs or by reducing expenses.
Keep cash reserves in place
Every business experiences shortfalls and this is where cash reserves come into the scheme of things. Every startup, therefore, must look to keep a significant sum handy, in order to combat sudden shortfalls and even sustain for a period of three to six months.
Make room for a worksheet
A good way to efficiently manage accounts and cash flow is to maintain a worksheet. The most essential aspect of maintaining the same is to keep a track of cash inflow and cash outflow in addition to the existing and upcoming projections regarding the same.
Collect deferred payments ASAP
There are quite a few customers who take time to make payments and in order to manage cash slow efficiently, it is necessary to collect the deferred payments, as soon as possible. The concerned business can delegate individuals for keeping an eye on the receivables and to collect the same within a certain timeframe.
Improve business visibility
While analyzing cash flow, maintaining worksheet, and keeping cash reserves can help startups with cash flow management, another underrated way is to improve online and offline visibility, precisely to attract customers in an effort to make them pay better and bigger. However, online visibility should be prioritized and businesses should concentrate on becoming brands in a manner that has been portrayed here. Once a business acquires exceptional online visibility, it becomes easier for it to reach the breakeven point sooner.
Extend the credit timeline
While it is a good practice to collect receivables as soon as possible, accounts payable should be settled as late as possible in order to keep the cash flow positive for a longer period of time. If the supplier payments can be held off for a significant amount of time, it becomes easier to keep the cash flow intact whilst minimizing the need for additional cash reserves.
In order to maintain positive cash flow while settling accounts payable, it is necessary to opt for unconventional methods like asset liquidation. This technique means businesses can and should consider selling any obsolete piece of equipment if it isn’t adding any value to the organization. This way, that particular asset can be liquidated as cash which can be used to stabilize the tumultuous finances. There are quite a few companies that sell of excess inventory in order to purchase newer items. This process is quite effective but extremely underutilized.
Opt for small and long-term financing
Businesses can rely on smaller lines of credit, in order to make purchases on an emergency basis. That said, smaller financial credits can also be used to minimize the gap between receivables and payables while keeping a tab on the shortfalls as well. Besides short term financing, long-term financial support can also be used to purchase bigger set of equipment or adding a greater chunk of investment into the business. While long-term financial support does attract sizeable interests, it makes sure that the working capital is preserved and business operations are initiated smoothly.
The importance of cash flow management cannot be understated
While these are some of the most efficient and rewarding strategies for managing business cash flow and accounting requirements, it eventually pans down to positivity of the concerned situation. In any given case, a business would be best served if the cash flow is on the positive side sans any kind of massive shortfalls to deal with. This is why concentrating on cash flow management is of paramount importance instead of focusing way too much on profit making.
Needless to say, cash flow management is slowly becoming an integral part of a company’s financial management and in the next few years it would evolve into an indispensible business tool. Moreover, a business will eventually see drier spells in due course of time and this is when cash flow management and proper accounting practices will make sure that things do not go out of hand.