When there is real or virtual movement of money, it is known as Cash Flow. A Cash Flow which happens from one Central Bank to another, it is called a Payment. The term Cash Flow is majorly used to describe payments which are expected to happen in the coming future. Cash flow is basically the income we have minus the expenses we make over a certain period. The question that always troubles an Individual is ‘How to manage the Cash Flow?’. Tackling this question and the problems is very big task.
The three factors which are interconnected to each other are value, interest rates and liquidity when it comes to Cash Flow. Cash Flow is used popularly in Businesses. In a Business, the net Cash Flow over a period equals to change in the Cash Balance in the same period. It becomes positive if the Cash Balance increases and negative if it decreases.
Cash Flow Statements have been dated back to 1950s by American Companies which helped keep the records of the sources of their funds showing it’s increases and decreases. Cash Flow is when there is either an increase or decrease in the amount of money of a either a Business, an Institution or an Individual.
Cash Flow can be better analysed when there is a proper record of a Cash Flow Statement. Summarizing the movement of Cash and Cash equivalents which comes in and goes out of a company, an institution or of an individual through the means of a Financial Statement is known as a Cash Flow Statement. This is to determine how good is the generation of cash which is needed to pay the debt obligations and also to pay the operating expenses.
Cash Flow is basically measured through metrics and ratios to make better decisions and recommendations with regards to their incomes and expenses.
This ratio is looked over by the analysts to see if the company can catch up it’s current liabilities with cash which it generates from operations. This is for the Investors and creditors to know if the company has enough cash and cash equivalents to settle liabilities of a short term. Enough cash is required for the company to keep on going.
To understand the true profitability, an analyst looks at the Free Cash Flow of a Company. Free Cash Flow determines how the company is performing financially and gives the company an idea on how much money they have if they wish to expand or to return to their shareholders, paying of their debts, paying dividends or buying back stock.
This method is used by analysts to measure the gross Free Cash Flow generated by a company. This doesn’t consist of the interest payments and shows how much cash is available before the company takes any financial obligations into account. The main difference between a levered and unlevered Free Cash Flow is if the company is overextended or is working with a healthy amount of debt.
Following is an example of how Cash Flow Statement is made
a) Cash Inflow
b) Cash Outflow
Cash Inflow is when the Business receives income through the activities they operate in. Cash Outflow is the gathered total of costs which includes the liabilities, servicing debts, operational functionalities incurred by the Business.
Financing Cash Flows generally show the net cash flows which are used in the funding the company and the company’s capital. These activities include or involve transactions like issuing debts, equity and paying dividends. This also gives the investors an insight into the company’s financial strength and how properly is the company’s capital structure is being managed.
A Cash Flow Problem arises when the cash which is going out starts outweighing the cash which is coming in. This leads to different problems for an Individual or for a Business. This leads to a struggle in making payments to people or suppliers and to pay the bills on time. Cash Flow is the ultimate indicator of finance depicting the health of the Business. The key aspect in building a Healthy Business is to have a good Cash Flow. But majorly, Cash Flow Problems become the biggest contributor in the failure of any Business. There are different causes which leads to having Cash Flow Problems in the Business.
Doing different Businesses, a lot of problems are faced when the time comes to get their money. The Standard Term is 30 days but often gets extended to 60-90 days. This creates a major drawback when it comes to availability of cash
There are Businesses which operate in a low volume but have high value orders. At any given time, large amounts of money can be there which is outstanding. The reason behind this are late payers who have large amounts that they haven’t paid. This affects Businesses as it disrupts their monthly commitments in the long run.
It is common in industries when there are late payments, but the chain of outstanding payments is always long. This creates a risk of contract which can lead to disputes and lengthening the time to settle the payments.
The costs which aren’t connected directly to the sale of a product or a service, they are known as Overheads. It is common for a business to see an disproportionate increase to the revenue because of the Overheads.
In the beginning of a new Business, due to not trading for long, there aren’t any cash reserves. Because of the dip in sales, the Businesses lose their key customers and when Late payments are added to the equation, the Business starts getting vulnerable.
Having a Business especially a small one, has it’s risks associated to as they choose borrowing to keep their Business running. But borrowing comes with a price. In such situations, Business is stacked with debts which they have to repay but they aren’t able to afford it. Cash which could’ve been used for the Business, ends up getting used for paying off the debts.
This is the most common issue of having a warehouse stocked with their products, especially for Manufacturers and Wholesalers. Having a stacked warehouse, totally depends on the level of stocks, if they are high, and the sales don’t occur, they end up just taking up the space.
Keeping a track of the incomes and expenses of the Business is very necessary but often ignored by the Business. Ignorance creates issues like not having the ability of accessing credit arrangements and payment of taxes on time.
Bad Debts are when a certain sale is made but there is no payment in return. Bad Debts damage the Businesses as they don’t have much revenue and reserve to bear the forthcoming losses.
Cash Flow Problems are created especially when the Cash Flow is poor. In simple words, Cash Flow creates a void for the Businesses to not invest and grow. A poor Cash Flow can make a really successful Business to go Out of Business. But this happens not only in Big Businesses but Small Businesses as well.
There are many problems which a Business faces when they have a Cash Flow Problem. These problems are mainly faced by Businesses which on their steps to establishment i.e. the Small and Medium Enterprises (SMEs). There are various factors which affect the SMEs to grow financially in the market and to become a brand.
When there is an unrealistic estimate and lack of a cash reserve, Cash Flow Problems start getting created. Bad circumstances might arise when there is a wrong estimation of funds at the beginning of the Business.
Whenever a new Business is started, there are expectations that the Business will start making profits as soon as it begins. Studies show that on an average a Business only starts making profits within the first four years of the Business. It takes time to make a Business profitable in the initial year itself.
A Cash Flow Budget is created to know the expectation of when to receive and pay cash during the period. This helps the Business to keep a track of your expenses on a day-to-day basis.
Cash Flow Problems often occur when the Business overlooks the Overhead Costs. Making different expenses can affect the profit the Business makes drastically. Reduction of Overhead Costs in the long run can bring a difference in the profits and lessen the Cash Flow Problems.
Due to slow payments, even a successful Business can turn into an Unsuccessful one. Problems start arising in a growth of the Business when the receivables aren’t on time. This can gradually create a halt in helping the Business to progress. Not paying bills on time due to slow collection of receivables leads to Cash Flow Problems.
Cash Flow Problems begin when a certain Business starts growing too quickly too soon. This starts hurting the Business slowly. Having a Business means having employees and which means giving the employees their wages and when there is a Cash Flow Problem, the employee doesn’t get paid on time. To fix such problems, banks can give a loan if the Businesses are willing to give a draft service contract or a letter of intent.
When the Business has a fair knowledge of numbers, pricing can be made the forte. Pricing is necessary to be known if the Business wants analyse their profits. Profit Margin helps the Business to determine how much money is made when the Business earns it. Either when the price is too low or when the costs are too high, it is a clear sign of a Low Profit Margin. Sustainability of a Profit Margin would not lead to Cash Flow Problems. Tracking the prices and costs can help in improving the Cash Flow of the Business as well.
When the Business owners total up their costs, they undermine the profit as they keep a margin to decide the prices of their goods and services. This often happens when Business owners see that if the demand of the product is high in the market, they lower the prices but end up getting less profits because of the discrepancy in the pricing.
When a certain product or services has already been given but the payments aren’t given on time, it starts affecting the Business. This slows down the process of Business owners being able to clear their bills of the suppliers or vendors.
The Errors made during Bookkeeping or the payments which are missed, slowly starting creating problems for the Business to operate smoothly.
Changes are necessary especially when the Business is having a Cash Flow Problems. Here a few changes if made, can help the Business grow and flourish.
Cash Flow Budget helps the Business by giving them an insight on how much money is going come in and go out in the given period. This will help the Business to also forecast their Deficit/Losses and when they will have a Profit. It also helps in getting a better understanding of how much more capital is needed. This helps the Business to make better decisions on how to make their expenses.
When an invoice is created, the payments become slow, and it creates a Cash Flow Problem. There are different online Invoicing Solutions which helps to send invoices and make the payments on time and online. It also sends the clients an overdue invoice notices to remind them to make the payment on time.
When there is a shortage of funds, the Business should start cutting back on their expenses. Controlling the budget and having an idea of the expenses can help improve the Cash Flow of the Business.
There are situations or circumstances, Businesses face when the payment doesn’t take place on time. For such scenarios, the Business should have a Cash Reserve or a Credit Line ready. .
Businesses often tackle with the issue of having the same sale cycle for selling their goods and services which get executed but don’t sell much. If sales are prioritized, especially if the Business focus on the product which are giving them the required profits, then the Cash Flow issues will get solved itself. Factors like bank financing and cost-cutting will also be helpful in such situations.
Depending on how the Business is working out in the given period, if a proper budget is maintained regarding the expected incomes and expenses on a monthly base, the Cash Flow will tend go smoothly than it usually did. Monthly forecast ould help the Business to function and grow better.
If the customers get the option of making their payments through Credit Cards, there will be quicker payments and lesser bad debts. And when it comes to Online Payment, it is way more convenient for the customer to make their payments for the required goods/services.
These methods will help the Business which get stuck, helping them to get through their Cash Flow Problems.
In Conclusion, there are pros and cons when it comes to having a Cash Flow but as stated in the blog, with proper planning, a Business can flourish and if not properly planned, a Business can become unsuccessful overnight.