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Cash flow is about how well the cash moves in and out of your business. It includes both spending and earning money through a series of business activities. In an ideal situation, you should have more cash coming in than flowing out of your business.
Cash flow enables your business to run smoothly as you are not experiencing a cash crunch. Having sufficient funds ensures you can run your business operations optimally and pay your employees timely. Managing cash flow promotes productivity; you are aware of how much cash is circulating in your business at any given time.
Understanding cash flow keeps you prepared for the worst situations that can potentially occur. While it is not a good idea to worry about the future, businesses must be prepared for unexpected expenses. Managing cash is key to staying in business even during tough times and emerging as a winner no matter what comes your way.
An insufficient flow of cash or an imbalance of cash coming in and leaving can give you sleepless nights. Cash flow management can reduce stress substantially because you have insights into how much cash is available for use. This allows you to plan better and use cash in hand wisely in areas that need it most. Properly managing your business’s cash flow gives you better financial control.
Managing cash flow is vital to small businesses because growth depends on it. Profits alone are not enough to invest back in your business because they alone are not clear indicators of a stable business. A healthy cash flow is needed to invest and grow your business. If you are generating higher profits at the same time, you can reserve cash for use in a myriad of areas.
Your bookkeeping practices must be optimal if you want good cash flow, and manual bookkeeping is a big no-no for those who want complete accuracy. If you are a start-up, you may do fine with manual bookkeeping; however, as your business grows, you need to opt for an accounting solution to ensure accurate bookkeeping. It is a reliable method to find out your cash flow situation at any given time by generating a report. You can see where you are spending most and where you can cut the expenses so that the cash flow is healthy.
Using accounting software to manage cash flow is simple because you can generate financial statements and make decisions based on those. This enables you to see your financial standing at any point and make amends before the problems expand to other areas of your business. Constantly ensuring you are abreast with your cash flow allows you to make changes instantly rather than wait until nothing can be done. It gives you more leeway and control over your finances, thereby providing better cash flow management.
Hoping you will always remain a profitable business is not the best outlook, as unexpected expenses can occur any day. If you are unprepared, it can easily cripple your business and force you to go out of business. If you are starting out, note that becoming a profitable business can take a few years, but you should make it a habit to start saving in a cash reserve as soon as it is feasible for you. Waiting to build a cash reserve until you are making high profits is not ideal, as you can always set aside a little bit as soon as you start making even small profits.
Is a cash reserve necessary even if you are getting loans at low-interest rates? Yes. The reason is that when you build a cash reserve in a bank, you will earn interest which is another incentive for saving. Certain economic conditions can cause interest rates to rise, and banks may become pickier when providing loans. If you want to be more in control of your finances, a cash reserve can provide all the benefits and take cash out from the reserve when the need arises, giving you more flexibility.
Inventory is one of the core functions of a business. If you rely on manual inventory management, there is a higher chance that your cash flow is suffering (or will suffer) because you don’t have up-to-date stock information. An inventory management software solution such as TallyPrime lets you stay on top of your inventory in all your warehouses. It automatically updates stock information so that when you retrieve information about your inventory, you can rely on its accuracy and reliability.
Inventory management directly impacts cash flow because overstocking and understocking will negatively affect your business. If you have overstock, you will have tied up cash that is blocking you from earning profits. If you have understock, you are not selling enough products, so the cash flow is low. You want to create a balance so that you have just enough to meet customer demand but not so much that it stays in your warehouse for months. An inventory management software can help you achieve this as it curates all inventory information and lets you generate reports to understand your products.
If you think that cash forecast is unnecessary, think again. Generating a cash forecast using an accounting software solution like TallyPrime helps you understand the financial standpoint of your business. This enables you to plan well in advance, depending on the projection. You can also assess the market situation, follow industry leaders, and be on the lookout for information regarding costs that can change due to upcoming economic conditions. Using both the software projections and your judgment, you can be prepared for any situation.
Many businesses have the problem of receiving payments on time. Their customers either always choose to wait until the deadline to make payments or pay past their due date. This causes immense stress and cash flow problems, thereby slowing down the business. To mitigate this problem, you need to improve your receivables. The first method to do that is to raise an invoice instantly when a transaction has been done so that the payee is aware of how much is to be paid and when.
The second method to improve your receivables is to provide incentives for timely or early payments. You can provide discounts on the next purchase if the customer pays on time this time. Or you can give a complimentary item on regular, timely payments. The incentive that works best for your customers should be chosen, provided it is not impacting your profits. You want to communicate the payment terms with your customers in a manner so they understand they must pay well before the deadline.
TallyPrime is an ERP software useful for managing various aspects of your business. One of its core functions is cash flow. Here are the many ways TallyPrime helps small businesses manage cash flow.
TallyPrime comes packed with other vital features such as inventory, payroll, invoicing and accounting, security, and credit management. Its advanced reporting feature allows your business to thrive based on valuable insights, and you can generate more than 400 reports using this tool.
TallyPrime’s Flexible Voucher Numbering Capabilities for Accurate Recordkeeping