How to Manage Cash Flow for Sustainable Business Growth

Businesses thrive with a positive cash flow. It gives them financial stability and the capability to pay off debts and liabilities without constraints. Thus, financial advisors and accountants leave no stone unturned in managing this aspect of the venture. A business does not become successful by acquiring clients and generating sales. It needs to ensure it is financially capable of paying its bills on time.

Thus, cash flow management becomes the most significant part of running a business profitably. However, it is not easy to keep the capital flowing into the entity at a higher pace than what is flowing out. Therefore, entrepreneurs must follow the steps given below to manage the cash flow effectively and achieve sustainable business growth. These tips are influential in paving the way for a financially healthy venture that can comfortably afford ongoing and unexpected expenses.

How to Manage Cash Flow?

Managing cash flow requires professional help to ensure the business has higher incomings than outgoings to avoid deficits and create cash reserves for bad phases. It implies that the business must efficiently collect, allocate, invest and spend capital for optimum growth. It can be achieved by following the steps below:

1. Prepare A Cash Flow Forecast

Cash flow management begins with cash flow projections which involve predicting the amount of capital that is expected to come into the business and the amount that will be going out. The accountant makes these predictions by analysing the historic financial record of the business. It helps to keep the entrepreneur informed about the sources of income during a specified period.

Cash flow forecasting also prepares for dry spells when the business generates a low income. Thus, the entrepreneur is better positioned to make informed business decisions, such as investment in equipment or stock. They understand the financial standing of the business and operate accordingly without facing delays in making payments to employees and suppliers.

The bookkeepers and accountants forecast cash flow by predicting the expected sales and expenses in the next quarter. They match it with the actual income and spending in that quarter to check the correctness of the projections. During the forecasting, it is vital to include expenses that often get neglected, such as annual subscriptions and business insurance premiums. Also, economic factors like inflation and interest rate must be considered while preparing the forecast.

2. Focus on Cash Flow Rather Than Profits

While business owners keep chasing profits, they fail to understand the significance of cash flow. Profits are misleading because they include intangible assets like goodwill. However, cash flow statements provide information about the cash available for paying bills. Thus, entrepreneurs who acquire a business for sale in South Africa must pay attention to cash flow statements to ensure they can manage their debts.

Cash flow becomes negative when the business generates a considerable income but cannot pay all the bills. It means the expenses are higher than income even though profits are good. Thus, entrepreneurs need a positive cash flow to enjoy sustainable business growth.

3. Improve Billing and Collection of Cash

Cash flow can be managed effectively by improving accounts receivables through a revamped billing and collection process. Entrepreneurs must include the payment terms in the purchase contracts to get the amounts quickly without delay and through the desired transaction process.

The first step to streamlining billing is to send out invoices immediately and inform the client of the due date. Accountants must provide them with quick payment options by sending links for online transactions and account details. They must follow up with the clients to remind them to make the payment. They can also offer discounts to get early payments and have a decent cash inflow.

4. Limit Your Expenses and Follow the Budget

Reducing expenses is a brilliant way to increase cash flow. Thus, accountants look into ongoing business expenses and try to bring them down to enhance the financial status of the entity. It requires making changes at the organisational level, such as moving into a smaller office with lower rent to reduce costs.

Also, the accountant must fix the budget for the quarter and allocate an amount to each department based on their projects. It ensures that they do not spend beyond the expected limit. Entrepreneurs must curtail unnecessary expenses by looking at their spending trends and switching to affordable resources. They can even opt for outsourcing or remote working to reduce expenses.

5. Monitor Performance Through Financial Reporting

Reviewing the financial statements is of utmost significance because it helps understand the health of the business. It gives a peek into the areas costing the business more than desired and those requiring funds. The profit and loss statement helps identify revenue-generating activities that can be increased to grow the business.

Similarly, entrepreneurs who purchase a business for sale in South Africa can eliminate the loss-incurring processes using the statements. The reports also help determine the clients that need to be chased for quick payments and the bills that must be prioritised. Staying updated about financial information ensures that the business controls its finances.

6. Build Cash Reserves and Invest in Technology

An effective way of improving cash flow is to save excess income as soon as it comes into the business rather than spending it. Improve your relations with suppliers to get discounts and deferred payments to keep the cash in the business for a long period. Entrepreneurs can also opt for government funding and bank loans to increase the inflow of cash.

In addition, they must invest in technology to improve productivity. For example, inventory management software ensures the business orders the required stock and delivers highly perishable items quickly to avoid damage. Similarly, payroll management tools automatically calculate salaries and wages and get them credited to employees' accounts. It accelerates operations, reduces risk and frees up workers' time for business development.

Wrapping Up

Businesses must have sufficient funds and savings to deal with uncertainties and unexpected events that impact income. The cash flow management tips mentioned above ensure the entity is never in deficit and enjoys sustainable business growth.