Why Maintaining a Great Cash Flow is Important for your Business?

The Art Of Recording The Vitamin C – ash  

The business accounting importance cannot be overstated, as there is more to a company’s financial health than what is outwardly visible. While many companies may appear to be thriving, a closer examination of their books can reveal a dire financial situation and a pressing need for cash flow management. A company’s reputation may not accurately reflect this reality, and investors are well aware that promises alone are not enough. They want to see results and understand the efficiency and regulation of a business, and one of the most powerful ways to demonstrate this is through a solid and stable cash flow

What Is Cash Flow?

The business accounting importance cannot be emphasized enough, especially when it comes to the cash flow of your business. Cash flow is the movement of money in and out of your firm or organization, including the money you make and the expenses you pay. If your inflow of money exceeds your outflow, then you have a positive cash flow, whereas if you have to pay out more than you make, you have a negative cash flow. Maintaining a positive flow to cash is a critical aspect of your business accounting, ensuring consistency in your accounts, credit, and statements. It’s essential to understand and maintain a steady flow to cash to regulate a strong and potential business. The flow to cash of your business venture can very well be the deciding factor between whether your company thrives in the future or you must finance your working capital through debt. 

Why Do You Need To Maintain A Good Cash Flow?

Even if you are making great profits in your business, it doesn’t ensure a healthy and positive cash flow that can support the growth of your business. Even a profitable business can face bankruptcy.Therefore, it’s essential to prioritize business accounting importance & implement strategies that ensure a positive cash flow and sustainable growth.

If you want to keep your business afloat, you need to keep track of your cash flow. You might have a lot of customers, but that doesn’t mean you can cover all your expenses. Keeping track of your flow to cash is essential for keeping your business afloat. Even if you have many customers, you may not be able to cover all of your expenses.

Consider a situation where a business might have received orders for Rs. 10 Lakhs, and have ordered all the materials to create their product for a total of Rs. 7 Lakhs. In addition to this, they have many expenses like rent, insurance interest payments etc. which add up to Rs.5 Lakhs. In such a situation, even if the business asks for more time from the creditor to pay their money back, they might not stay open for a very long time.

Not only is a great cash flow important to keep your business open, but it is also important for its growth. A strong cash flow gives you the opportunity to re-invest your money in order to expand and grow your business. Having a positive flow to cash allows you to invest money in research and development, or to build new infrastructure for your business, or to expand your area of expertise. The opportunities for growth go on increasing as the health of your flow to cash improves. The possibilities are simply endless.

How To Maintain A Good Cash Flow?

So surely, you need to understand how to maintain a good cash flow and when there are so many ways and techniques out there, here are a few major and effective ideas to consider:

When to Pay and Get Payed?

While paying your vendors, it is better to push that payment as much as you can and take the maximum time to pay your vendors or suppliers. This strategy leads to an interest-free line of credit and also allows you to keep your working capital in use for as long as possible.

Another way to maintain a steady cash flow is to take advance payments. This will allow you to put that capital to use sooner and also help you avoid taking debt to use future cash flows. Set your terms of payment clearly to your customers beforehand and closely track and collect all overdue accounts.

EMIs – The Smart Choice

When it comes to using supplies and equipment you want the best. But all good things come at a great price and many times it exceeds the monetary potential of the company. A high risk many take assuming the sales will exceed expenditure. The smart way to save yourself from bearing any losses is to purchase the equipment and material on monthly installments, more commonly known as EMIs. This enables you to pay the money in small amounts, and as and when you make more sales, there is some portion coming back. You can buy most of your equipment like laptops, furniture, machinery etc. on an EMI basis, which can help improve your flow to cash. This also allows you an opportunity to upgrade your equipment with ease..

Incentivize, But Smartly

The use of incentives can increase cash flow in business by enticing customers to make purchases more frequently or for a longer period of time.

 For instance, many businesses offer discounts or early bird offers on big purchases to motivate customers to buy quickly, resulting in a faster influx of revenue. One example of this strategy is Spotify, which offers a reduced monthly fee of Rs. 99 when customers pay for an entire year of premium service, rather than paying Rs. 129 per month. By utilizing these tactics, businesses can maintain a steady cash flow, receive payments in advance, and keep customers satisfied, benefiting both the company and the buyer.

Trim, Trim, Trim, And Avoid

Every business includes smart, rational, and straightforwardness in its policies. It’s only rational to ensure that you’re working to earn maximum profit. A great way to increase your cash flow would be to cut out all your unnecessary expenditures. Do you have to spend that much on packing? Do you need that many containers?

Avoid going overboard on non-essentials that are possibly only a dash or sprinkle on your product and cut out those extra things or materials that are a supposed obstacle and could be taking a share of your profits. ‘Don’t glitter it up, it’s the product that matters at the time of the day.’

Keep A Track

It’s crucial to keep track of your financial status regularly to maintain a healthy flow to cash. Stay up to date with payments, bills, deliveries, entries, and all other financial aspects to know where your numbers are changing. It’s also important to maintain a constant level and period of outflow, ensuring that there is an accessible balance. Taking advances can be a useful tactic to guarantee timely deposits and prevent falling behind in the inflow stream.

Regularly checking your accounts is essential to prevent falling into debt or allowing long overdue payments to accumulate. When the status reaches a certain limit, it’s crucial to take action and implement measures to avoid disrupting the well-kept flow to cash.

Benefits Of A Good Cash Flow 

Here is what you receive by regulating a steady and solid cash flow:

• Estimation of profits: a solid cash flow allows you to know where you stand in terms of expenses and income thereby giving an idea of your profit status
• Better business-oriented understanding: maintaining cash flow helps learn improved ways of doing business not only with suppliers but also customers
• Increased scope for savings:  with a better cash flow, you can always have scope to cut-out expenditure and reinvest your profits.
• Maintaining of cash reserves: a good cash flow can allow you to create cash reserves so you’re not blank and confused when issues strike

 Also Read: Cash v/s Accrual Accounting

Cash flow can prove to be a great indicator of the health and the future of your business. Therefore it is imperative that you always keep on top of your cash flows and make sure that it doesn’t dip to the negative side.

Click To Know About Our Accounting Services