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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.
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In a business, Cash is King!
Trying to run a business without managing Cashflow is like trying to drive a car without a steering wheel. Even if you reach somewhere, the success won't last for long.
Cashflow is that pulse of the business that can force your business to come to a standstill. Many businesses remain profitable on paper and eventually end up in bankruptcy. This is because of the deficit between the amount of cash coming in and going out. Hence, you will often see that more than anything else, smart business owners ensure that they are always in control of their Cashflow. Not only does it gives you detailed clarity of the position of cash in your business, but helps you plan your financial future as well.
How to manage the Cashflow in your business?
Cash makes your business run smoothly. There are several key elements that are required to manage your Cash flow and it is the successful management of these elements that helps you navigate your business to success.
Here’ what you must do for effective management of your Cash flow:
1. Measure your capital needs
Not knowing of your cash requirements is like walking on a road blindly. If you don’t know how much cash your business needs to operate, you will always feel the crunch. Therefore, it is absolutely necessary to take a stock of your exact cash requirements. Some of the questions that you must cover include…
2. Forecast future Cashflow and set targets
One of the best ways to keep a control on your Cashflow is to maintain a Cashflow forecast. This means predicting your future Cashflow requirements (ideally for 12 months). Not only does it give you a peek into the future, but also helps you stay prepared for all potential unforeseen circumstances.
Post the forecasting, it is necessary to create several milestones or targets for your Cashflow. Setting targets is an excellent way to ensure that the business functions smoothly, and transitions from the present to the future without any shortage of cash.
3. Maintain cash reserves
There will always be good days and bad days. You will have cash shortfalls. The very survival of your business depends on how you manage and survive these bad days when you are short of cash. The best way to go about this is by parking some cash in your bank account. You can even keep adding more to grow the surplus.
4. Monitor your cashflow regularly
You will only be able to manage and drive your cashflow in the right direction if you monitor it regularly. This means keeping a regular tab on the accounts receivable, inventory, accounts payable, capital expenditures, P&L statement and taxation. To be able to function smoothly, you have to be particularly clever with your cash flow; hence, it is always a great idea to assign the task of closely monitoring the cash flow to a trustworthy employee.
5. Cut down on costs & cash in on your assets
Cash will not be freed when you make more revenues or profits but when you adopt strict measures to curb your costs and expenses, and/or sell off your dead assets or inventory. There will always be some monthly, quarterly or annual expenses that can be avoided or renegotiated. This will greatly help you to free up cash.
6. Get a line of credit and credit cards
A business line of credit is like an insurance policy for most of your Cashflow problems. You can get a line of credit from your bank by keeping a percentage of your accounts receivable or inventory as collateral.
On the other hand, getting a credit card is very easy. You can get it from your bank with a limit that will depend on your business. Not only does a credit card act as a cushion to your cash problems, but also offers reward points that can be put to good use for the benefit of your business.
7. Stay on top of invoicing
The process after the completion of the job itself is time consuming and ends up blocking your cash unnecessarily. Therefore, you must send invoices via mail (physical and electronic) as soon as the job is completed. There is a separate person, department, address that you have to send the invoice to. So do make sure to keep all that information handy with you in order to avoid being shuffled from department to department.
8. Timely release of payments by clients
Accounts receivable blocked is a blocked flow of cash. The faster you receive the payment, the better it will be for you to make payments and run the business. Therefore, it is very important that your clients release your payments on time. Here are some of the ways how you can do it:
9. Measuring cashflow separately
Profits and Cash flow are two different things that give you information about two separate situations. Rules of accounting define Profit simply as revenue minus expenses. While Cashflow is a combination of several financial figures including accounts receivable, inventory, accounts payable, capital expenditures and taxation, it is not limited to the P&L statement. Therefore, it is essential that both are measured separately to avoid confusion.
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