It is often said that ‘Cash is King.’ This is especially true in a small business, where prudent cash flow management is crucial to business survival. Essentially, cash flow management entails postponing cash outflows and increasing the cash inflows into the small business. There are several strategies to enhance the cash flows into a small business. We shall delve into the ways in which one can increase the cash flows into a small business.
Strategies to enhance cash inflows:
Opt for Short-Term Financing: Short-term unsecured loans can help fund emergency purchases or meet the temporary shortages between payables and receivables. Such small business loan can be availed to overcome immediate cash flow problems, with minimal paperwork.
Prompt collection of Receivables: Small business units should adopt the strategy of billing early and collecting quickly. Speeding up the realization and processing of receivables would result in the injection of quick cash inflows and reduction of credit cycles. This would reduce the possibility of assuming further debt. One could alter the invoicing frequency to suit the cash needs. Instead of waiting until the end of the month, one could generate an invoice as soon as the goods or services are delivered. Further for sizeable orders, one could adopt progressive invoicing. For example, this would entail a deposit at the time of the order and subsequent payments depending upon a predetermined milestone.
Adopt Easy Payment Modes: One must maintain frequent contact with the customers and send periodic reminders of outstanding dues. Also, make it as easy as possible for your customers to pay you. For example, one could include a payment link on the invoice so that the customers can easily pay using a credit card.
Free up Cash Tied Up with Assets: One could consider a sale of redundant inventory or outdated equipment, which would generate quick cash. Idle equipment would be occupying space in the godown, which could be utilized fruitfully to accommodate running machinery. This would result in savings of carrying costs. Further, machinery that has been retained for long would usually have a carrying value in the books equal to its salvage value after considering the depreciation. Hence a sale would result in a taxable gain.
Incentives for Early Payments: One’s profit margins might take a hit if discounts are extended to customers to encourage early payments. However, preponed payment will positively impact the cash flows. In the long run, debtors realization earlier than the billing cycle will prove advantageous to a small business.
Boost revenues: This is indeed the tried and tested method for increasing cash flows. However, there is a shortfall associated with this method. To increase the customer base, enhance customer retention and boost volume sales, one will have to consider the pricing aspects. A higher price may result in lower volume growth and higher profit margins. Alternatively, a competitive price would propel sales units and generate more cash inflows. Hence small business units need to strike a balance between cash inflows and profitability.
Extend Your Payables days: One could try and negotiate to extend the due date of the payables. This may seem an easy option but there are certain drawbacks. Firstly, the suppliers should be willing to extend the payment period without levy of late penalty. This also involves the risk of potentially ruining relationships with vendors.
Matching concept: Acquisition of fixed assets or capital expenditure should be ideally funded by long term loans. This would enable spreading the repayment over the life of the assets. This would also help preserve working capital for business operations. Hence the short term, small business loans should be applied for working capital needs and long-term loans should be used to fund capex plans.
Cash is the fuel for a well-oiled business organization. A healthy cash flow cycle is vital for a small business entity’s fundamental going concern assumption. Failure to properly manage the working capital requirement for daily business operations can result in a cash crunch situation or a liquidity problem. This occurs when the cash outflows exceed the cash inflows in a given period of time. This situation is especially aggravated in small businesses and start-ups, which lack considerable buffer money to tide over a liquidity crisis. After all, without cash, profits are only on paper and are therefore meaningless.