Prevent cash flow porblems
Simply put, the cash flow is a reflection of what you have come in and what you've got out of. It's all too tempting, on that basis, to conclude that if the former number is higher than the latter, then all is well. But note, cash flow is not necessarily the same as benefit.
A large number of unpaid transactions in receivable accounts that do not arrive for a number of weeks on paper may appear lucrative. It can put your company in a precarious situation, in fact. Especially if you have unpaid receivable accounts, and your suppliers instantly demand payment.
These kinds of voids are, unfortunately, especially dangerous for fast-growing and profitable product-based companies. Why? Why? And any time you land a new client, before you get paid, you'll need to buy raw materials to meet their orders (not to mention investing in new people and equipment).
But what steps should you take to avoid issues with the cash flow and boost your overall cash position?
1. Keep a forecast on cash flow
Business volatility still exists, so keeping your cash flow estimates reliable and up-to - date will definitely help you deal with the volatility. Looking at last year's sales, you should get a good idea of what you're going to make this year. If there has been a crisis or loss of revenue, turn to a month-by - month perspective and build from there.
Then measure the cost of manufacturing your products and services, as this will help you change your forecast should large new orders come in unexpectedly.
Around the same time, note to consider all of your fixed costs — the cost of running your property and paying your employees, including wages, leases, market rates, bills — and tax demands of course.
2. Comparison the predictions directly with reality
Your predictions would be worthless unless you keep comparing them to facts to see if you've got your figures correct.
If you do so on a month-by - month basis, you will be able to fine-tune your estimates, which in turn will allow you to estimate how much cash in hand you will have a week, a month, or even a year.
3. Prepare several estimates on cash flow
Preparing three separate predictions is a safe way to defend yourself from any unexpected surprises:
A win-win situation
A nightmare case
A middle-of-the-road alternative
You will need to look at how your business is changing in order to achieve these figures; consider seasonal cash flow problems; consider whether new entrants are likely to present a threat, and consider whether your current customers are completely satisfied or are considering other suppliers.
Now you can handle these forecasts separately by conventional spreadsheets or if you are searching for a more flexible approach, you may want to try an approach like LivePlan for business planning. Whatever alternative you choose, just be sure to keep them up-to - date based on the developments you see and make sure that one represents the current financial outlook in a practical manner.
4. Keep it practical
Don't give in to the urge to believe that all is going to be fine; unrealistically optimistic predictions can easily lead to trouble.
Make sure you don't change dates like this, just to make sure the figures look nice. You want to hear about them now if there are going to be issues down the road so you can minimise them.
Actionable Cash Flow Perspectives
Symptoms of serious problems with the cash flow
Speaking of issues, even though you consistently monitor and estimate your cash flow, it can be difficult to define these. But it need not be, because all it takes is to consider the possible signs that predict incoming or ongoing problems.
As you work through the process optimization list to prevent problems with cash flow, bear in mind the following five indicators to help you avoid common cash flow issues.
1. Your receivables are strong
Many companies invoice their customers and collect payment after delivery of the service or product, so it's common to have some unpaid invoices at any given stage. The problem is that you don't have their cash available to you to cover your costs before your customer pays. You've just got the pledge to pay them.
If you see your receivables higher month after month but don't carry in more cash, it's time to take a closer look at your payment terms and invoicing method.
Consider keeping track of the receivables turnover ratio (net credit sales over average accounts receivables balance) to see if the company is doing well with the collection of its receivables. A low ratio may mean that it is time to reassess the terms and policies of your payments.
2. You have high inventories and low amount of orders
Companies that sell their goods to other companies may prefer to have a lot of inventory on hand to make sure they can fulfil orders of all sizes. But if much of your cash is tied up in the inventory, and your buyers aren't rushing to buy, you may start seeing issues.
You won't have liquid cash available to pay your bills until your inventory products are finished. Plus, you will pay to store it and you start running the risk of destroying or stolen your inventory, or just being lost or less in demand before you can move it.
3. You are overstretching your company
While you might be very keen to swiftly scale or expand your company, it's important to make sure you do so at a fair rate. If you overextend your company, there is a lot of risk that your cash will be invested in capital and operating expenses, making your company less flexible in the short run.
To avoid having to manage overextension-related cash flow issues, be sure to schedule your development well in advance. Do not just invest and hope for the best — periodically checking your main financial statements — cash flow statement, income statement, and balance sheet — can help you get a more accurate image of where your company is going and where it is heading.
4. Your profits are down
The economy is now in a state of shambles. You may have a lot of new competition there. Whatever the case might be, if revenues in the last few years have been gradually decreasing, there is a fair risk that the profit margins will be cut as thin as possible — if they even exist at all.
As the operating costs are unlikely to adjust, declining revenues will suggest that there are imminent cash flow issues. You may want to change your plan, or at least your expense budget, to counteract declining revenue.
Look down a little further from there:
Where do you make losses from? Is there a certain population where you sell less than you used to?
Is there a problem relating to technique or process? Is your Website sales page broken? Are the consumers in person unhappy with the customer service?
Are there any developments at the macro level taking place in your industry right now that impact traditional benchmarks?
When was the last time you redefined people to your customer or looked at updating your message?
Is your business model still sensible?
Is that a seasonal fluctuation in your business?
If there's a month or two off sales, you do not have a major problem to tackle. But, if you start seeing a longer-term pattern, it is a good idea to make sure you have a strategy in place. Mitigate threats by being aware of them, continuing with them and drawing up a remedial plan.
5. Its company is clearly not profitable
At the end of the day, if you spend more money than you take in, it shouldn't take a rocket scientist to tell you that sooner or later you 're definitely going to have cash flow issues.
If you are in such a position, you may want to re-examine your business model in order to see if it can be modified to increase profitability. It might also be time to consider whether it makes sense to raise your rates.
Noticing one of those symptoms is not necessarily an emergency in your company. Take the time to look closely at your financial results, and make sure you plan far enough into the future that if you're coming up on a harder period, you can get a loan or credit line.
Enhance cash flow
Even after careful preparation and symptom detection you can still find that you need to boost your cash flow significantly. This could be due to a mere financial failure, an economic recession, or other factors.
To get started, check out our article on optimising your cash flow if you need to find fast and proven solutions to improve your liquidity.
A large number of unpaid transactions in receivable accounts that do not arrive for a number of weeks on paper may appear lucrative. It can put your company in a precarious situation, in fact. Especially if you have unpaid receivable accounts, and your suppliers instantly demand payment.
These kinds of voids are, unfortunately, especially dangerous for fast-growing and profitable product-based companies. Why? Why? And any time you land a new client, before you get paid, you'll need to buy raw materials to meet their orders (not to mention investing in new people and equipment).
But what steps should you take to avoid issues with the cash flow and boost your overall cash position?
1. Keep a forecast on cash flow
Business volatility still exists, so keeping your cash flow estimates reliable and up-to - date will definitely help you deal with the volatility. Looking at last year's sales, you should get a good idea of what you're going to make this year. If there has been a crisis or loss of revenue, turn to a month-by - month perspective and build from there.
Then measure the cost of manufacturing your products and services, as this will help you change your forecast should large new orders come in unexpectedly.
Around the same time, note to consider all of your fixed costs — the cost of running your property and paying your employees, including wages, leases, market rates, bills — and tax demands of course.
2. Comparison the predictions directly with reality
Your predictions would be worthless unless you keep comparing them to facts to see if you've got your figures correct.
If you do so on a month-by - month basis, you will be able to fine-tune your estimates, which in turn will allow you to estimate how much cash in hand you will have a week, a month, or even a year.
3. Prepare several estimates on cash flow
Preparing three separate predictions is a safe way to defend yourself from any unexpected surprises:
A win-win situation
A nightmare case
A middle-of-the-road alternative
You will need to look at how your business is changing in order to achieve these figures; consider seasonal cash flow problems; consider whether new entrants are likely to present a threat, and consider whether your current customers are completely satisfied or are considering other suppliers.
Now you can handle these forecasts separately by conventional spreadsheets or if you are searching for a more flexible approach, you may want to try an approach like LivePlan for business planning. Whatever alternative you choose, just be sure to keep them up-to - date based on the developments you see and make sure that one represents the current financial outlook in a practical manner.
4. Keep it practical
Don't give in to the urge to believe that all is going to be fine; unrealistically optimistic predictions can easily lead to trouble.
Make sure you don't change dates like this, just to make sure the figures look nice. You want to hear about them now if there are going to be issues down the road so you can minimise them.
Actionable Cash Flow Perspectives
Symptoms of serious problems with the cash flow
Speaking of issues, even though you consistently monitor and estimate your cash flow, it can be difficult to define these. But it need not be, because all it takes is to consider the possible signs that predict incoming or ongoing problems.
As you work through the process optimization list to prevent problems with cash flow, bear in mind the following five indicators to help you avoid common cash flow issues.
1. Your receivables are strong
Many companies invoice their customers and collect payment after delivery of the service or product, so it's common to have some unpaid invoices at any given stage. The problem is that you don't have their cash available to you to cover your costs before your customer pays. You've just got the pledge to pay them.
If you see your receivables higher month after month but don't carry in more cash, it's time to take a closer look at your payment terms and invoicing method.
Consider keeping track of the receivables turnover ratio (net credit sales over average accounts receivables balance) to see if the company is doing well with the collection of its receivables. A low ratio may mean that it is time to reassess the terms and policies of your payments.
2. You have high inventories and low amount of orders
Companies that sell their goods to other companies may prefer to have a lot of inventory on hand to make sure they can fulfil orders of all sizes. But if much of your cash is tied up in the inventory, and your buyers aren't rushing to buy, you may start seeing issues.
You won't have liquid cash available to pay your bills until your inventory products are finished. Plus, you will pay to store it and you start running the risk of destroying or stolen your inventory, or just being lost or less in demand before you can move it.
3. You are overstretching your company
While you might be very keen to swiftly scale or expand your company, it's important to make sure you do so at a fair rate. If you overextend your company, there is a lot of risk that your cash will be invested in capital and operating expenses, making your company less flexible in the short run.
To avoid having to manage overextension-related cash flow issues, be sure to schedule your development well in advance. Do not just invest and hope for the best — periodically checking your main financial statements — cash flow statement, income statement, and balance sheet — can help you get a more accurate image of where your company is going and where it is heading.
4. Your profits are down
The economy is now in a state of shambles. You may have a lot of new competition there. Whatever the case might be, if revenues in the last few years have been gradually decreasing, there is a fair risk that the profit margins will be cut as thin as possible — if they even exist at all.
As the operating costs are unlikely to adjust, declining revenues will suggest that there are imminent cash flow issues. You may want to change your plan, or at least your expense budget, to counteract declining revenue.
Look down a little further from there:
Where do you make losses from? Is there a certain population where you sell less than you used to?
Is there a problem relating to technique or process? Is your Website sales page broken? Are the consumers in person unhappy with the customer service?
Are there any developments at the macro level taking place in your industry right now that impact traditional benchmarks?
When was the last time you redefined people to your customer or looked at updating your message?
Is your business model still sensible?
Is that a seasonal fluctuation in your business?
If there's a month or two off sales, you do not have a major problem to tackle. But, if you start seeing a longer-term pattern, it is a good idea to make sure you have a strategy in place. Mitigate threats by being aware of them, continuing with them and drawing up a remedial plan.
5. Its company is clearly not profitable
At the end of the day, if you spend more money than you take in, it shouldn't take a rocket scientist to tell you that sooner or later you 're definitely going to have cash flow issues.
If you are in such a position, you may want to re-examine your business model in order to see if it can be modified to increase profitability. It might also be time to consider whether it makes sense to raise your rates.
Noticing one of those symptoms is not necessarily an emergency in your company. Take the time to look closely at your financial results, and make sure you plan far enough into the future that if you're coming up on a harder period, you can get a loan or credit line.
Enhance cash flow
Even after careful preparation and symptom detection you can still find that you need to boost your cash flow significantly. This could be due to a mere financial failure, an economic recession, or other factors.
To get started, check out our article on optimising your cash flow if you need to find fast and proven solutions to improve your liquidity.
