Money is an essential part of ensuring a successful and sustainable business. After profits and making revenue, management of those finances needs to follow. For a small-medium enterprise, having an accountant as part of the team is an investment.
Cash flow management can be explained as tracking every single transaction coming in and out of business. This can be done by interrogating the business’s income and expenditure statement, and each transaction should be kept in a ledger for tracking purposes. This ultimately assists the business to know where it could potentially face financial woes.
How often does this happen?
For a small start-up, reconciling an expenditure and income statement should be a weekly exercise. As the business grows, one can employ a monthly system and implement checks and balances to track transactions. As invoices are paid, other incomes are made, and cash is flowing in, it is equally important to keep track of the expenses accrued in the business at the end of the month. A weekly system allows the business owner or accountant to know if the company will meet its monthly obligations.
How does cash management keep a business afloat?
Keeping cash inventory is one of the key business pillars of building a sustainable business. According to the online learning platform, inc.com, “cash is king”, which means that the business cannot operate or fulfil its purpose without cash. Making money is a very big part of keeping the business and more importantly sustaining the business. However, the life and durability of the business over the years relies heavily on the management of the cash injected. Therefore, there needs to be a balance between the money coming in and the money going out. Ideally, a business owner should separate themselves from their business, in other words separating business and personal finances and kept in separate accounts.
Small businesses need to get into the habit of saving and investing profits back into the business. In the first three or five years of the company, the profit made should not be paid out to directors or shareholder. Taking the decision to re-invest the profits will do things for the business, one, compound the revenue made in the business, and secondly grow the business, allowing it to survive in tough seasons.
The business primarily exists to service its core clients that have a personality of their own and are somehow attached to the businesses.Poor cash management leads to various challenges for businesses, and these include inability to meet daily operations, dishonouring services and contracts with services providers, bankruptcy and business rescue for big firms. Small firms have the advantage of a few overheads, however good financial management also involves chasing invoices and following-up with clients for payments.
Good cash flow management allows the business to earn a good credit score with its creditors (the bank) and other investors. When you maintain cash flow management, you can build a good credit rating. This means that it will be easy to access credit lines with the banks and access funding, loans, and grants from potential investors. Managing your cash well shows investors that you can safeguard cash flow and manage your expenses — a measure of good financial management any investor is always looking for in its returns.