How can one improve a business cash flows

Ayushi was clueless, as she talked with her friend, Vikram, a finance enthusiast over a cup of coffee, to discuss the recent cash crunch in her tech start-up.

In spite of having a profit of around INR 500k since the past two years, we always fall short on our payments. I dont know why that happens! she said.

Vikram realised that Ayushi was unaware of the differences between profit and cash.

Like Ayushi, many of us are not aware of the difference between profit and cash.

Profit contains several elements credit sales are added and non-cash expenses such as depreciation and provisions are deducted.

Whereas cash (also includes bank balance, short term liquid investments, other securities etc.) is the actual money available in business.

So, it is quite possible to have earnings, yet no cash. In such a situation, it becomes indispensable to adopt certain measures to improve cash flow management. Here are some ways to boost cash position in 2019 –

Lease, not buy; repair, not replace:Instead of purchasing an asset upfront, one can opt for leasing by making instalments, which helps improve cash flow. Lease payments also help save taxes, as the lease amount is deducted from profit before tax.

Similarly, one can get plant and equipment repaired instead of replacing them as they can reduce cash outflow in the short as well as long run. One can also postpone product or tech upgrades if it is not crucially required.

Expedite the receivables, defer the payables:One should strive to collect receivables (on sales) at the earliest by offering discounts and continuously tracking due date vis–vis payment by customers/clients. A hardened collection policy is required not only when there are cash flow issues but at all times. After sending an invoice, one needs to follow up with the client to check if they have received it. Many times, the payments are delayed just because the invoices do not reach the accounts department on time or never at all. Follow ups at regular intervals are required to remind the customer/client for the payment.

Similarly, by not availing of cash discounts offered by suppliers and making payment only at the end of the credit period (time allowed by the supplier to make payment), one will be paying out cash only when they are absolutely due.

Inventory management: Techniques like just-in-time manufacturing can help in meeting demands as they arise and avoid unnecessary cash blockage in inventory. One can also offer discounts to get rid of slow-moving items of inventory and free up a lot of tied up capital.

Put cash to work: One must research the market and invest their funds in high-interest bearing liquid deposits and funds. It will give a higher return on every penny deposited, and one can also withdraw the money whenever needed.

Hire professional accountants: Bringing in an experienced accountant to manage cash flows can be a farsighted decision. They will not only manage expenses and incomes but will also provide an expert opinion on hidden cash trapping expenses. Also, tax planning is an essential aspect to ensure minimum tax outgo while in compliance of all tax laws.

Always remember that revenue is vanity, profit is sanity, but without cash, its all a tragedy!

Want advice on managing your cash flows or on getting a professional advisor on board Reach us at [email protected] or on +919369364646, and we shall assist you.