Cash flow is the term used to describe a business’ cash position at any one time. Your cash flow may be positive or negative, depending on a number of factors, but if it’s negative, it can have a devastating effect on the business.
Negative cash flow
Although the company profits may be healthy, your cash flow may still be struggling, which can force the business into insolvency. Careful planning can help to prevent problems with cash flow, especially if you combine your efforts with regular monitoring and forecasts. Monitoring the cash flow can become a time-consuming task, which is why so many company owners outsource to an accountancy service, although you should still develop an understanding of the situation.
No matter how much time you spend planning cash flow, there are some external factors that can have a negative impact. This may include difficult trading and economic conditions, which can create financial problems for clients. This may in turn result in them not being able to pay you in a timely manner, or your own supplier may want to curb payment terms, giving you less time to settle bills. If you have a healthy reserve of cash available, you will be able to survive this difficult period without extensive damage to the company.
During difficult times, your company has to maintain payments for suppliers, rent, salaries and other bills, which may place your company in jeopardy. A healthy reserve can help to avoid problems.
Positive cash flow
From the day you start your business, you will have a number of investments that are required. This may include new machinery, moving to new premises or recruiting employees. If you have good cash flow, you will always have the required investment available. You will be able to make sound financial decisions based on healthy cash flow. You also require cash to pay your own suppliers within the agreed payment terms. Defaulting on payment could create problems with your line of credit.
How to improve cash flow?
If you are experiencing problems, make sure that you issue invoices promptly, requesting payment within a shorter period of time. Add an incentive by stating that penalties will be charged for late payment. If your cash flow is really poor, try to locate a cheap source of finance or a business loan. However, be aware of the repayments and make sure that there will be sufficient cash flow to cover the payments.
If you would like advice regarding cash flow and how to improve it, contact us today.