Friday, 28 August 2015

HOW ENTREPRENEURS SHOULD FORESTALL CASH FLOW PROBLEMS


Tectono Business Review has observed that many business owners, particularly new ones have problems in managing their cash flow. This circumstance has made it difficult for them to manage their business operations adequately. Yes, in an attempt to attract customers and improve sales, most business start-ups offer discounts and give extended credit period to loyal customers.

Consequently, after sometime, business start-ups are incapable of replacing stocks and have problem in meeting customers’ demand, and to cap it, the once booming business begins to depreciate.

Tectono Business Review has underscored the main errors such business start-ups make as obtaining loan at high interest rates with a short repayment period. Such business owners rather than investing the funds in products that can bring in return on investment within a short period, they spend it on high-priced infrastructure that have no immediate returns. In business, cash is king and for a new business, a regular cash flow is very important.

All activities revolving around business require cash, and when it is not properly managed, the business may fail. Below are how to avoid cash flow problems:

Be selective in offering credit
The habit of offering credit to customers involves giving them the option to purchase products or services now and pay for them at a later date. In most manufacturing and construction industries, credit are extended through invoices but that may not be practical for every business. The advantages and disadvantages of extending credits have to be weighed.

Credit offering to customers has to be selective and business owners have to launch an investigation to determine whom to give, how much to give and the number of days to give for payment. They should consider extending credit if that is the only option required for customers to buy from them. If handled very well, it can keep the business afloat. But if not managed properly, it can lead to business failure. When extending credit, the cash required for business operation within the period given for payment has to be recouped through other means. This method helps in strengthening business-to-customer relations and reduces unnecessary emphasis on the price of the products or services.

Work with good cash plan
It is important to understand the amount of money that goes into expenditure and incoming cash over a period of time. This will help you to make budget for each month, make investments and have enough to meet with unexpected cash obligations when it arises. After studying your cash flow for some months, make an estimate of expected revenue from services or goods for the next month. For a small business that has obtained loans from banks, ensure that the profits from the business are able to cover the recurrent expenditure and repay loans.

Get your pricing right
Companies experiencing cash flow management problems may have under-priced their products and services to satisfy their customers. Increasing your prices may lower sales volume slightly but will enable the business manager to make up for decreased volume with higher profit margins. Lowering the prices can as well increase profits because the level of patronage will increase significantly. The market’s response to higher prices should be tested by changing prices in targeted areas. Price review should be carried out on an annual basis. In order to reduce cash flow problems, Sage accounting offers some suggestions

Prioritize efficient stock management
Efficient stock management is just as important as managing cash flow. Business owners should reconcile their stock records at the same time when they reconcile their bank accounts – either weekly or monthly. This way, they will remain on top of items that they have left in stock and those that require reordering. An efficiently managed stock control system will have a positive impact on their cash flow because they will never be holding too much stock, or have all their money tied up in it.

Minimize your expenditures
Avenues through which cash leaves the business should be re-examined to identify loopholes. Assess the frequency with which you pay suppliers, tax bills, utilities. Is it possible to pay in installments or make terms more flexible? Use your powers of negotiation to strike deals that are favourable to you and your business. Also, check on all those little things you spend money on that can add up – as the old saying goes, watch the pennies and the pounds will take care of themselves.

Foresee problems before they happen and avoid them
Monitoring market conditions and observing the trends can help businesses to identify problems. You have to identify potential cash flow problems in advance by regularly updating your cash flow forecast, monitoring market conditions, keeping an eye on customers and suppliers who may be in trouble, and taking action as soon as you see a problem. Don’t bury your head in the sand and hope an issue will go away. By keeping on top of your cash flow you’ll be able to deal with problems quickly and efficiently.