Controlling cash flow and liquidity is a key factor in corporate governance. Little experienced founders and young entrepreneurs can easily overwhelm this task. Here are ten recommendations on how company leaders can keep their finances under control and ensure a positive cash flow.
Always keeping track of your financial situation is a challenging task for entrepreneurs. Cash flow plays an important role in this. It indicates how much capital has flowed in or out within a year. This means that the payments made and paid by a company are compared with one another, and the liquid funds are calculated from them. A positive cash flow means that the company has generated a surplus and can, therefore, finance necessary capital investments or research projects from its financial resources. If, on the other hand, the cash flow is negative, the expenditure in the period under review was higher than the income, resulting in a deficit.
With This In Mind, The Principles Of Cash Flow Management Are Simple:
First, it’s about making sure that you earn more than you spend. In addition, the money must be received on time so that the company can pay its suppliers and invest in inventory and supplies. It is also important to consider any financial bottlenecks that may arise and draw up emergency plans.
The cash flow is calculated from the annual surplus plus depreciation and increases or decreases in long-term provisions. The following ten tips will help founders and young entrepreneurs achieve good cash flow:
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An accounts receivable control system ensures that customers pay on time. This not only ensures that invoices are sent promptly and that outstanding debt is settled consistently. In this way, exact credit limits and payment terms can also be set because: A company should always be informed about incoming payments from its customers and not grant unreliable payers any unwanted loans.
Create A Sales Forecast
To prepare for peaks and dips in the cash flow, it is advisable to forecast the future business development once a year. The expected demand can be determined with the help of parameters such as your prices, the level of competition, and the current economic situation. The sales forecast should be more cautious than optimistic about avoiding unpleasant surprises.
Avoid Unnecessary Expenses
To secure the cash flow, it is important to scrutinize every single item when spending and always keep an eye on where the money is going. It is also important to only accept good value for money when making investments and limit purchases to needed goods. It is also worthwhile to carry out specific cost-benefit analyses in this context.
Negotiate Favorable Terms With Suppliers
Those who negotiate longer payment periods with their suppliers can benefit from better cash flow. Because if the invoice has to be paid after 60 days instead of 30 days, the money stays with the company longer. Especially with large orders, for example, it is worth renegotiating and agreeing on installment payments.
Keep An Eye On Stocks
Close monitoring of stock levels ensures that only necessary items are ordered, and unnecessary expenses are avoided. It is also helpful to know which of your products will sell quickly and profitably. This keeps the income stable, and the capital is not tied up in items that are difficult to sell. If you need a quick injection of cash, you should sell out obsolete stocks at low prices.
Do Not Tie Up Funds Unnecessarily
To always be liquid, it is important not to tie up too much capital when purchasing important assets, for example, IT infrastructure. Here it is advisable to ask suppliers for financing with a one-year term, for example, or to take out an overdraft facility.
Maintain Good Relationships With Lenders
The books should always be up to date to be prepared for possible borrowing. And in any case, in case there are difficulties with repayment, it is better to speak to the lender than to ignore the situation.
Free Up Cash From Bills
Another way of controlling liquidity is to discount invoices and thus work with a provider of the relevant services. When a third party “buys” an invoice, this frees up funds that are particularly important in growth phases. Some lenders pay up to 90 percent of the invoice amount. However, it is advisable to compare the available service providers’ fees and check their reliability carefully.
Pay Attention To Warning Signs
Falling sales, defaulting customers, fines for taxes paid too late, and the late payment of supplier invoices are classic signs of liquidity problems. Such signals should therefore not be ignored under any circumstances. Because as long as no mountain of debt has piled up, it is usually easier to increase working capital.
Analyze Your Own Company In Depth
If a company is not making a profit, it is not enough to look at individual cash flow, sales, or your prices. Internal factors can also be responsible for the situation. For example, it is often worthwhile to rethink certain processes.