Personal finance is all about cash flow management. It is not only applicable in managing personal wealth but it can also be applied to manage a business.
Just like in personal wealth, cash flow is the lifeblood of any business. Without it, the business is like a person drained of blood which could eventually lead to death or bankruptcy.
The cash that goes in and out of your business is what determines your financial position. If you are in a cash surplus, you can possibly invest the excess money in short-term investments. On the other hand, if you are in a cash deficit, you may need to source financing to bridge your cash shortfalls. Thus, for you to do good forecasts and effectively deal with changes in your cash position, you need to clearly understand the various factors that affect your cash flow.
In business where projected sales or revenue is the source of the budget, managing cash flow always starts with making sales forecast. This is particularly the case if your business doesn’t provide long-term credit to customers. Examples are businesses like food cart franchises, restaurants, service centers, and similar activities where sales transactions are made in cash or by credit card. The cash projection can be made simply by assuming the amount of sales you expect to generate for a particular period, including the seasonality of your business.
If there is revenue, there will always be expense. For cash disbursements, you will need to project your various expense categories. For some expense items like rental, electricity, supplies and salaries, you may simply get their historical monthly averages during the previous year and project those to the current year, with some minor adjustments if need be.
Many business owners tend to overbuy inventory to take advantage of wholesale discounts especially when they project their sales targets too high for a special occasion such as a holiday season. While this could be financially beneficial, the risk of loss could sometimes be greater than the potential rewards.
Depending on the industry where you belong, you should identify the factors that affect your inventory demands so you can control and manage them better. To begin with, demand for inventory is affected by seasonal factors such as special occasions like the holiday season.
In managing inventory, you need to consider turnover period of your products as some items move quickly while others move only after some time.
Managing Financing Costs
Capital is one of the major problems of every business. It would be best if your capital came from your savings as you don’t need to pay interest costs. However, if you just loaned it from a friend or relative, from a bank or from other financing companies, then this means additional costs for you in the form of interest expense or financing costs.
Always look for the best source of credit. Compare banks and financing companies which provide the lowest interest.
Managing Accounts Receivables
If you are in the wholesale business, your business would be likely to provide credit to customers. The typical credit you can give to customers range from 30 days to over 90 days depending on your willingness to invest in accounts receivables and on the level of competition in the industry of your business.
To accurately forecast your cash flow, you need to know the pattern of cash collection and to also know your customers. There are customers who always pay on time, but there are also customers who always delay and make it difficult for you to collect. If you have problems in collection, you can sell your sales invoices online through Market Invoice as they can advance up to 90% of the money your client owes within 24 hours.
Managing Accounts Payable
When managing cash flows, timing your accounts payables payments is as crucial as collecting your accounts receivables. You can manage your accounts payable better by stretching out the payment terms as long as possible without damaging your credit standing with your suppliers.
There are some business owners that pay their payables too early simply because they have so much cash. However, what they don’t realize is that they are losing the opportunity to earn extra income by investing it into short-term investments. On the other hand, there are business owners who pay their suppliers too late and end up being slapped with penalties and charges. It is thus important that you manage your payables to the best interest of both you and your suppliers.
Managing cash flow in a business is certainly more difficult as compared in managing your personal finance. But with proper planning and effective management, you can make your business flourish and in the process, help more people through employment.