Salwana Selamat, Senior Lecturer, Faculty of Accountancy, Universiti Teknologi MARA, Cawangan Perlis.
Cash is king. This is a common phrase often used to describe the importance of having sufficient cash as current assets in businesses (Kenton, 2022). Cash is the most liquid resource used to pay the regular obligations of the business. Sufficient cash enables the business to carry out its short-term operations, pay overheads such as wages and salaries, make purchases, acquisitions, and promote business growth. Therefore, proper cash management is critical for businesses. It can be said that cash management is referring to the optimal use of cash for liquidity, profitability and the correct collection of receivables and payments, as well as investments.
Sometimes there are problems with a business’s cash flow because customers do not pay their debts on time, are unable to pay within the due date, and in some cases the debts become irrecoverable. At the same time, expenses increase in all months, payables, staff salaries, overheads, and others. Of course, the lack of cash puts a lot of strain on the business. Cash flow is the money that flows in and out of the business. Money flows into the cash register as income and out of the cash register as expenditure, resulting in the business having a positive or negative cash flow in a period (Schooley, 2022).
A positive cash flow means that the business has a sufficient amount of money to meet its expenditure and, if it is lucky, some left over to add to the reserve account (Warnes, 2021). Negative cash flow, on the other hand, means that the company is using more money than it is taking in. This can cause the company’s reserves to go down which is the most dangerous action of all (Warnes, 2021). It may happen that a company experiences a negative cash flow in the course of its business. Here are some tips we can try to help the business deal with this problem (Beaver, 2020):
Weekly financial review
Keep track of income, either cash or credit and expenses. Pay attention to bills due from accounts receivable, obligations to accounts payable, and other expenses. Use this as a cash flow budget to predict monthly cash movements, which can help the business to better plan funding needs of and have an adequate amount of money.
Improve invoicing procedure
There are several ways to improve the invoicing process to increase the inflow and outflow of cash in the company:
- Issue the invoice to the customer immediately to get the fastest payment.
- Establish clear and simple payment terms that show when payment is due and the consequences of not paying on time.
- Charge a penalty for late payments.
- Encourage early payment by offering discounts.
- Prepare an aging receivable analysis to know the status and send reminders to the customers concerned.
- Factoring the unpaid invoices.
Reduce expenses
The company must review the operating expenses and wisely plan for all expenses that can be saved. They should be aware that some expenses are still important and will help to sustain the business. Below are some ideas on how to reduce business expenses:
- Reduce the area of the workplace to reduce rental costs.
- Reduce warehouse space by keeping inventory at the right level.
- Switch to a new supplier to find favorable prices.
- Check the consumption of utilities to a minimum.
- Avoid taking on long-term debt with higher cost of financing.
Limit your inventory
Too much inventory can lead to serious cash flow problems. Keep a close eye on inventory on daily sales activity which can provide valuable information. This allows for more accurate forecasting of future sales and inventory.
Increase sales.
One of the ways to improve cash flow is to make more money by promoting quality and trendy products. Market the products by expanding the product information as a whole so that the communication flow is accessible through the social media platform. Prepare an easily accessible interaction platform to reach buyers and sellers.
Technological advances
Businesses can benefit from technological advances and artificial intelligence solutions, such as new apps and software updates. These can streamline business processes and increase efficiency, for example debt collection and marketing. The right technology and business strategies can make a big difference to a business. They can allow the business to spend less time worrying about cash flow and more time in running the business.
Cash flow management is extremely important for the survival of a business. Poor cash flow management can lead to the failure of the business. Therefore, understanding cash flow as the most important indicator of the health of the business is essential to run the business with confidence. The above tips can help the business to increase cash inflow and achieve positive cash flow to ensure the liquidity of the business.
Overall sufficient cash on hand is essential for a business as it indicates the ability of a business to cover short-term operations. The greater the level of cash, the easier a business able to pay its operating expenses and debt obligations in running its daily operations.
References:
Janet Berry-Johnson (2021). Cash Flow Statement: Explanation and Example. Bench. Retrieved from https://bench.co/blog/accounting/cash-flow-statements/#mvb
Kenton, W. (2020, August 5). Cash is king. Investopedia. Retrieved from https://www.investopedia.com/terms/c/cash-is-king.asp
Scott Beaver (2020). 13 Tips to Solve Cash Flow Problems. Oracle NetSuite. Retrieved from https://www.netsuite.com/portal/resource/articles/financial-management/cash-flow-problems-solutions.shtml
Skye Schooley (2022). Struggling for Cash Flow? Strategies for Survival. Business News Daily. Retrieved from https://www.businessnewsdaily.com/15017-cash-flow-strategies.html
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