How can cash flow management help in eliminating cash flow problems?

Cash flow in a business is referred to as the money that is coming into the business and the money that is going out of the business. A business may experience several problems with regards to cash. Since cash is one of the most important part of a business. Cash flow management is crucial for every business as it provides an insight and showcases the financial position of the company to the investors. Thus, businesses must oversee the cash related business activities and ensure an effective supervision of cash.

Types of cash flows

Cash flows are divided into various types, let us go them and understand their meaning –

Operating activities

Investing activities

Financing activities

Cash Flow Problems

Cash problems arise in a business when the debt increases more than the profits or revenue that the business must generate. It refers to the debt payments that increase as compared to the cash inflows. A company becomes incapable to cover its financial liabilities when it starts experiencing cash flow problems. For instance, if they do not receive money from the retailers or wholesalers to whom they have provided the products.

Causes of cash flow problems

Before planning and executing strategies to solve cash problems, it is crucial to understand the possible causes of cash flow problems,

Absence of cash reserve

Every business must have some amount which must be kept aside as cash reserve. A cash reserve proves to be beneficial for the business at the time of cash emergency.

Late payments of invoices

Invoices must be paid on time; else the businesses will struggle and will not be able to maintain a cash flow of the business.

Excessive amounts of inventory

Keeping large amounts of inventory not only takes up a lot of space, but huge amounts of cash are kept idle in the form of the inventory that is not yet sold. Thus, companies and businesses must find out ways that eliminates the storage of inventory.

High overhead expenses

Certain overhead expenses that a business has to incur are rent, electricity bills, utility bills etc. Many times these expenses exceed the revenue of the company which could increase company’s liabilities.

Expensive debts

The problem of an expensive debt arises when the company has various cash advances and loans that have a high price.

Inaccurate sales forecasting

Sometimes businesses invest in huge amounts of money after looking at the demand which may or may not materialize. In cases where the demand is not as expected by the businesses, they end up incurring huge financial losses which results into several other issues.

CAUSES OF CASH FLOW PROBLEMS

ABSENCE OF CASH RESERVE

LATE PAYMENTS OF INVOICES

EXCESSIVE AMOUNTS OF INVENTORY

HIGH OVERHEAD EXPENSES

EXPENSIVE DEBTS

INACCURATE SALES FORECASTING

How to solve cash flow problems?

Cash flow problems must be resolved by the company as soon as it arises. For management of cash flow you must take necessary steps and implement strategies that would stop the company from facing further losses with regards to cash.

Certain ways in which cash can be retrieved back in the business are as mentioned below –

The most important way in which cash flow problems can be eliminated or reduced by implementing a cash flow management strategy which proves to be effective.

Businesses must build a cash reserve by planning its budget in an effective manner.

Offer discounts to the clients if they pay before a certain amount of time

The inventory levels must be managed in such a way that it stays in the warehouse for the shortest time possible and must be available when the clients require them.

Cut down expenses that are permanent and consider cheaper options wherever possible.

If companies have several high priced and expensive loans, they must consider refinancing those loans

The forecasts that businesses carry out are not always as accurate as it seems, in such cases they must have a cash reserve, outsource employees for a temporary basis etc.

Importance of Cash Flow Management

Talking more about the effectiveness of cash flow management, the reason it is recommended by several companies is because it has many benefits. In this section, we will look into some importance of it –

Increases the accuracy while counting of cash

Helps in the elimination of errors

Maximizes the availability of cash at times when it is required

Adequate cash helps in taking business decisions related to cash

Cash Flow Management Strategies

Businesses and large corporations often take up different tactics and plans that help in diminishing cash problems. In this section, we will go through certain strategies that benefit businesses in the successful management of their cash.

Request for a deposit or milestone payment

Request customers to pay at the stipulated time

Delay unnecessary expenses that are not required at the moment

Request favorable payment terms from vendors

Finance purchase orders

Invests cash in purchasing assets

Increase margins

Sell or lease idle equipment

Sell future revenue

Cash Flow Management Services

A crucial aspect in the management of cash flow involves an effective supervision of the outflow and inflow of cash. In this section, we will talk about various cash management services that are used by most companies and businesses.

Preparation of financial reports

Monitor company growth

Preparation of cash flow analysis

Preparation of financial and income statements

What are the different cash management tools?

There are certain techniques and methods by which cash flow management can be successfully undertaken.

Short term instruments

Checking account

Savings accounts

Long term low risk savings instrument

Conclusion

The possibility of cash flow problems will be more if the business does not take appropriate measures on time. Utilizing various solutions related to cash flow can solve many problems. It is the business’s responsibility to determine the problems and propose sufficient strategies. Thus, cash flow management is significant for the business.

Enterslice is a Financial Technology Company and CA Firm. Our team of experts helps firms resolve their complex legal, risk, and compliance related issues and to get Company Registration, NBFC License, and FSSAI Registration etc.