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If you have a business, but you do not have cash flow, you should start keeping as much memories of the business as you can because, very soon, you won’t have a business any longer.  Without cash flow, you cannot pay for supplies, pay bills, pay salaries, reinvest in your business, or pay yourself.

But we may be getting ahead of ourselves. What exactly is this cash flow? And why is it so important?

Simply put, cash flow is the entire sum of money coming in and going out of your business. If you are able to manage this flow of money, your business is healthy. If you aren’t, your business is- or will soon be, on life support.

Most every business, at one point in time or the other, has experienced cash flow problems. Some ended these problems once and for all. Some were ended by these problems, once and for all. We assume you do not want to belong to the latter category. We would learn how to end those cash flow problems in a bit. But first, let us learn a few reasons why these problems happen, in the first place.

  • Experiencing Losses or Low Profits: If you have consistently low profits, or you experience losses, even if you have a large reserve, you will eventually need to shut down operations, or be forced out of business.
  • Over-Investment in Capacity: If you invest too much short-term finance on fixed assets, you sacrifice liquidity.
  • Holding Too Much Stock: Holding too much stock ties up valuable cash and hinders cash flow. If held stocks lose value, or become obsolete, that spells doom.

Cash flow is the entire sum of money coming in and going out of your business.

    • Allowing Customers Too Much Credit: Though extending credit is a somewhat good way to build sales, if your customers are dishonest or delay payments, whatever benefits can be gained, are invariably lost- along with much more.
    • Overtrading: If you expand your business too quickly, growing sales faster than you can finance them, you will put a lot of pressure on short-term finance. This usually leads to enormous accounts payable or accounts receivable [money owed to your creditors, listed under liabilities; and money owed you by your debtors not paid] and a lack of working capital to finance your operations.
    • Seasonal demand: If you experience seasonal demand in your business, then you typically produce or purchase in advance of seasonal peak in demand and that results in large cash outflows before inflows, in other words, you would typically spend huge amounts to purchase items well in advance of when you would start getting orders.

    Having looked at some of the problems (their solutions are implied) let us look at other means to end cash flow problems in your business.

    1. Have a Detailed Schedule of Expected Cash Collections: A schedule of expected cash collections is a very important tool in business. It lets you know how much you are expecting and at what time. If you draw this up, with worse case scenarios, you will be able to draw up plans on what to purchase, when to purchase them, when to make payments and settle bills and whatever else you want to do. If it does happen that there is a default, simply adjust the schedule to accommodate the change.

    2. Be Careful How You Extend Credit: If you extend credit to a customer and they default or just cannot pay, if it is a sizable transaction, that single bad debt can send you out of business for good. Before you extend credit facilities to a customer, ensure that they have first created a history of meeting up with payment timelines. Quite evidently, this means you should never extend credit to a first-time customer or one who hasn’t built credit-worthiness with you over time. And where you can, secure whatever credits you extend.

Giving discounts on early payments is an effective way for getting payments faster.

  • 3. Before You Fulfill Orders, Cover Your Costs: When preparing terms of payment, it is smart to ask for deposit payment before working on fulfilling orders. Deposits must cover the cost of materials to be used or time to be invested. If the deposit can cover a bit higher, for contingencies, all the better.4. Offer Discounts for Early Payments: One very effective methods for getting payments faster is by giving discounts on early payments. This strategy works very efficiently because people naturally love saving money. So it is a win-win.

    5. Create Priority List for Payments: You should sort those you need to pay in order of priority. Typically, those debts that attract the highest interests or penalties for default should be sorted out first. Always. Every other things can be sorted out afterwards.

    6. Ask For Credit: Extending yourself by committing payments, especially when you are low on cash flow, is not the smartest thing to do. So, when and where you can, ask for credit from your suppliers such that you will pay when your customers pay, while you free up cash for other needs.

    Armed with all you have learned so far, there is little reason why you should run into cash flow problems, or why you shouldn’t be able to handle them when you do. And your business would be better for it.

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