How Businesses Can Deal with Cash Flow Shortages

Cash flow is key to any expanding any business, but if there is a cash flow shortage a business not only fails to expand, it cannot survive. It is an essential component to any business venture, and it is especially significant to small businesses. Owners of these businesses survive with the flow of cash in and out of the business. It gives you the power to strategize. Once cash flow stops, however, it is incredibly difficult to dig the business out of the hole and will infect every aspect of the business. Read on to see how small businesses can keep money moving in the right direction.


What is Cash Flow?

The concept of cash flow is pretty simple on the surface, but it covers a wide range of topics. First it includes accounts received and accounts that are payable. There are differences between profits and cash flow, although it is quite hard to make a profit if you struggle with the flow of currency. It is crucial for start-ups and seasonal businesses, but it is important for businesses of all sizes. Putting together a cash flow statement and forecasting your expenses for the off season will not just allow you to plan ahead, it will give you an essential method to expand.


Accounts Payable vs. Accounts Receivable

The liability to an account that tracks money leaving your business is accounts payable. It may include employee payroll, bank loans, or other business expenses. Meanwhile, accounts receivable are assets that keep track of money coming into your business. These are funds received from clients for goods and services. Both can help you determine how profitable your business should be and can be. You can do so by including accounts receivable and subtracting your total accounts payable. When the results are positive, the business will be profitable.


Profit vs. Cash Flow

Cash flow only represents the balance in your bank account. This means that it is possible to turn a profit and have no funds in your account, but it is always easier to make money when you have some already. Cash flow is important not as much as an indicator of profit, but as the power to invest more money into your business by keeping money coming into it. A business could turn a profit in a month but only see a portion of the cash because the rest is pending in accounts receivable. They aren’t interchangeable, but cash flow definitely helps you profit.


How Can We Free up Cash?

There are many examples of cash flow problems in various industries. One is when developers run into problems before their development sells off. Particularly if the property market happens to soften during construction, many developers are forced into bankruptcy because they simply don’t have any cash for extended periods. According to the experts at the site MoneyPug, which is used in the UK to look for short term loans, extending credit is another common way for businesses to run into these problems. Invoicing is usually in 30 or 60 day terms. It isn’t unusual for customers to delay payment, which can leave businesses in a cash flow crunch.

So how do you solve these problems? First, you should always perform a cash flow analysis on a regular basis. Use cash flow forecasting to take necessary steps to get ahead of cash flow problems. Accounting software programs typically have built-in reporting features. The second step of managing cash flow is to develop strategies that will maintain adequate cash flow. An example of this is when small businesses shorten the cash flow conversion period so your business can bring money in more quickly. When your business is trying to expand, you might need injections of cash during the growth phase. While you can take out business loans, it is always wise to be careful with your credit.

When it comes to cash flow, it doesn’t matter what kind of business you are. You need cash on hand at all times. Just because your field is prone to cash flow problems doesn’t mean you should take it. Plan ahead. Predict the problems you will face. Look for answers to questions that haven’t been asked yet. When you do these things, you will have a much easier time managing cash flow and staying in the green.


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