There are multiple common sayings in business finance and “Cash is king” is one of the most popular among them. Surveys have revealed that the reason behind the failure of most businesses is cash flow issues. It is good go make profits quickly, but cash flow is important for continuing operations.
Start-up businesses often face troubles holding on to cash. The primary reason is debts. An understanding of cash flow will help you as an owner to get a clear picture of the debt and cash. You also need to understand cash budgeting, management of cash flow and the connection between profit and cash.
What is free cash flow?
Free cash flow is the money your business generates after dealing with cash flow and capital expenditures. So, free cash is that money which you have left with you.
Always remember the one big rule about money. A dollar today is of less value tomorrow if you don’t put it to some use. This is why the free cash concept was invented- to find ways of putting the unused cash to some use.
Ratio analysis helps you find out the liquidity of your firm or how successful you’ll be in meeting the short-term debts you are obliged to pay. Liquidity is the ability of a business to pay the short-term debts.
The two most common rations are:
- Quick ratio- The quick ratio reveals if you have the money to clear the short-term debts or if you need to arrange the money from some other place.
- Current ratio- The current ratio lets you know the ratio of current assets to present liabilities. Cash, inventory, and accounts receivable are all current assets.
Ways of maximizing cash flow:
- Inventory is one current asset that can influence cash to a great extent. Inventory is the products or services you sell.
- Accounts receivable are nothing but the credits you give to your customers. Collecting the receivables quickly boosts cash flow.
- Another short-term, effective strategy is pay all ‘accounts payable’ on time.
Cash management in difficult times
During hard times poor management of cash can be the end of your business. In times of recession or other crisis, business managers need to address shortfalls, cut spending, and focus on generating as much revenue as possible. Department heads as well as the employees should try their best to come up with a better plan for cash management. You might require to take some harsh measures as well for the survival of the business.
Keys to good management of cash
Cash management is of supreme importance for both new businesses and growing businesses. The bottom line to wise management of cash is staying informed with the help of tools available to you.
In the first few months you might find it difficult, but overtime you’ll learn to manage cash effectively. Develop a deep understanding of the manner in which cash flows into your business and out of your business, and prepare a cash budget for achieving healthy cash balance.