One of the main aspects of building a stable company is strong cash flow. Cash flow issues are sometimes mentioned as being a major contributor to small business failures. It’s critical, there is no denial, so your cash flow plans shouldn’t be an afterthought.
When you start your company, it is vital to prevent and resolve cash flow issues — the start on the wrong foot can be hard to recover. But even though you’ve been in business for a while, the cash flow status should still be kept in mind constantly and correctly in order to prevent any problems.
Cash flow is the flow of money in your company and out of it. In general, companies track weekly, monthly or quarterly cash flow. Two types of cash flows are essential:
Positive cash flow: This happens when cash from sales, account receivables etc. enters the company is higher than the cash left from accounts paid, monthly expenditures, employee wages, etc.
Negative cash flow: This happens when the cash outflow exceeds the cash received. In general, this means a business challenge, but you can take measures to solve the negative problem of cash flow and to enter the positive region.
Now that you have a good understanding of the fundamentals of cash flow, see how you can find solutions to the issues of cash flow:
1) Short term financial support
Short-term funding, such as a loan, can be used to purchase emergencies or to fill the gap regarding debts. Many banks issue credit cards to their sellers that you can use to pay.
2) Long-term financial support
Long-term loans rather than work capital can normally be used to fund major asset acquisitions such as machinery and real estates. This makes it possible to distribute payments over the average asset life. You pay interest, but for business transactions you have maintained your working capital.
Cash liquidation linked to assets.
Do you have equipment that you don’t need any more or an old inventory? Consider selling it for fast cash. Idle, redundant and unworking machinery takes on more production space and links resources. Equipment owned for a longer period normally has a book value equal to or below its rescue value, so sales can result in taxable income. Your tax filings should include this benefit. However, if you have to sell the book value below, you may lose the taxes that could be used to compensate the company’s other earnings.
Excess inventory will soon become redundant and valuable as the needs of customers shift and new materials present themselves. Take into account the sale of any inventories that are unlikely to be used for the next 12 months, without a minimum retention costs and a negligible sales revenue.
Small business owners usually get to know one thing – “Cash is King.” Construction and maintenance of a sufficient stock of cash provides any company with full versatility while allowing its owners to sleep well during the night.
Profits are worthless without cash. Many a successful paper company has ended up in bankruptcy because the cash that enters is not comparable to the cash that comes out. Companies who do not handle cash well may not be able to make the investment they need to compete, or may have to pay more to borrow money to work.