The process of tracking sales and expense is straightforward and involves just basic calculations. However, most businesses often do not realize they have been spending more than they have been earning. According to a study conducted by a U.S. bank, poor cash flow management has been the main cause of the failure of small businesses. In fact, 82% of business failures are due to cash flow problems, with poor understanding of cash flow management being the fundamental essence of the issues.
What is cash flow?
The cash flow of a business is controlled and affected three key aspects of the business, the amount of money that is coming in, the amount of money that is going out and the amount of capital that will be readily accessible when the business undergoes a period of trading difficulty, these of which can be categorized into accounts receivable, accounts payable and access to capital respectively.
Understanding accounts receivable and accounts payable
Accounts receivable is related to how much money is flowing into a business. It is the amount of money owed to a business by its customers and/or other debtors. Needless to say, the amount of money that is flowing into a business has a significant impact on the business’s cash flow. When it comes to managing accounts receivable, small to medium-sized businesses often face the biggest challenges and make the riskiest mistakes, such as failing to demand payment, failing to negotiate advance payment terms and missing out payment milestones. These factors can negatively affect the financial performance of businesses. On the other hand, accounts payable relates to how much money is flowing out of a business. It is the amount of money owed by a business to its creditors. Being just as vital as accounts receivables, accounts payables are often neglected by new business owners. Unexperienced business owners often forget to allocate enough funds to cover taxes, fail to effectively estimate and budget their future costs and so forth. However, there are several ways for business owners to manage these two major aspects of accounting. Business owners can utilize a computer program to track the revenues and expenditures of their businesses and develop a cash flow forecast. In addition, outsourcing the management of these accounts to a professional is also an option.
Capital access – backup plan for financial hardship
Capital is related to the amount of money that is available for a business when it requires financial assistance. It can exist as a loan, equity, or free cash. If a business is able to access hard cash at any time when it needs an extra cash inflow to close a gap between its budgeted revenue and expenditure, it will likely survive through tough times. However, successfully acquiring capital doesn’t come without a cost. Many business owners inject capital into their businesses by means of their personal assets, such as borrowing money from banks on a collateral basis. Ultimately, obtaining a loan for a business that is experiencing negative cash flow issues or is expected to generate a net loss may be one of the most viable options.
For business owners, being able to manage accounts receivables and payables is a skill that needs to be mastered. However, if your business is already facing financial difficulties, you may be able to find quick cash loans with no bank account required on the internet.