A Guide to Managing Your Business Cash Flow

Business Growth
October 17, 2022

To many Filipinos, cash is king. It is the lifeblood of any business and the lifeblood of the economy. For many, they use their own money to start their business here in the Philippines.

Cash serves multiple purposes such as enabling business growth, allowing capital expenditure investment, paying for inventory management, and providing for salary costs. However, a lot of small businesses struggle when it comes to managing their cash flow and, in some cases, cause the downfall of the business.

How can you manage your cash flow better?

To better manage your cash flow, you need to do the following in order and repeatedly every quarter:

   1. Cash Flow Statement

You need to prepare your cash flow statement which is divided into 3 segments: operating activities, investing activities and financing activities.

  •  Operating activities cover the production, sales, product delivery, payment collection, inventory purchase, advertising cost, etc.
  •  Investing activities cover the purchase or sale of assets like land, building, machinery, securities, extending a loan to suppliers, etc.
  •  Financing activities cover investor’s cash inflow, bank transfers, shareholder’s cash outflow, etc.

Once you have your cash flow statement properly documented, you will be able to measure how well your company can generate cash to pay your debts and fund your operating expenses. This will provide a summary of the amount of cash and cash equivalents’ going in and out of the business. It will also provide information on your company’s liquidity, which tells you how easily you can convert your assets into cash, and solvency, which tells you if you have enough money or liquid assets to pay for debts and obligations. This enables you to understand your company’s financial footing on whether you need help to fund your cash flow gap or not. Here is a good example of how to prepare a Cash Flow Statement and how it should look like.

Managing your Cash Flow Statement

In most cases, small businesses have a hard time managing their books and practice proper bookkeeping practices because of lack of manpower, lack of expertise, or lack of time while juggling through all the day-to-day business activities they need to perform to keep the business afloat. One remedy that some businesses use would be investing in accounting software to properly track their income and expenses.

    2. Cash Flow Analysis

One of the biggest reasons small businesses fail is because of their lack of funding which is why it’s important to understand the nitty-gritty in your cash movement. Through the cash flow statement, you will be able to understand the strong and weak points in your cash flow movement. This will enable you to break down where your money is coming from, where you need to cut down on expenses, which part of your investments are working and where you need to allot more of your money to see its growth.

A good determinant of how efficient a company is performing and what part of the process needs adjusting is taking a peek at its Cash Conversion Cycle. Through this calculation, you will be able to regulate and control the inflow and outflow of your company’s cash. To easily get your Cash Conversion Cycle, note that you need to add your inventory turnover with your accounts receivable and subtract your accounts payable.

In simpler terms, you need to find out how long it took since the company paid to get raw materials and the profit received from the sale of those goods or services which you can learn more about here. The shorter your cash conversion cycle is, the better it is for your company’s liquidity.

Source: https://www.elearnmarkets.com/blog/why-is-cash-conversion-cycle-important/

A quick example would be the attachment below, do you think Company A or B has the better cash conversion cycle?

The answer is Company A. Because it means that it takes Company A -5 days to get money in before you have to pay it out. If your Cash Conversion Cycle is low or produces a negative number, it is an indication that your working capital is not tied up for long. Unlike Company B which would need 45 days to get money in and then have to pay it out. In this case, Company B would highly likely need financing to help them bridge their cash-flow gap.

Solution for Cash Flow Problems

Nowadays, a lot of businesses get help with managing their cash flow by getting funding for their shortages through bank loans or alternative lending, depending on what they value the most. For those who value speed and convenience, alternative lending through Financial Technology (FinTech), or online lending is the most suitable option for them. While those who value rates and can wait for months of processing time tend to go for bank loans. Depending on the length of the Cash Conversion Cycle and Profitability of your business, you need to figure out which one is best suited for your business needs. Learn more about the different business loans in the Philippines to know which will match your business here.

When deciding to go for financing partners, remember to take into account the details surrounding your Cash Conversion Cycle to figure out how liquid you are and the amount you will be needing to borrow. To further understand the importance of the Cash Conversion Cycle and how it can help your business to be more efficient, learn more here.

    3. Cash Flow Forecasting

Cash Flow Forecasting is vital for your business as this predicts how much you will be moving in and out of your business for a certain time frame. This will allow you to project your future financial position, enable you to anticipate expenditures and income that you will incur and inform you of how much money you will need. You will be using your historical data to help back up your assumptions and point you in the right direction.

The 3 key things you need to include in your cash flow forecasting would be:

  1. Sales

First, you need to look at your historical performance and see if there is a trend or pattern for peak sales and seasonality or if you run any marketing promotional activity that yielded to fruition. This will then give you a rough picture of how much sales you might make for a certain time frame. Also, don’t forget to take into consideration current events. Keeping up to date to the news in the current trend, market performance, or crisis could be very impactful for your business positively or negatively.

  2. Payment

Next, you need to factor in when you are expecting to receive payments from your buyers. Important to factor in the delay in payments, as in all businesses, which you can get from your past transactions with them or if it is your first time transacting with them, you can do your research and ask around if anyone knows about their payment behaviour.              

  3. Expenses

Lastly, you need to estimate how much money you will be paying out to your suppliers, employees and any other costs you have. In every business, there are fixed costs and variable costs being experienced monthly. It would be simple and straightforward for fixed costs since they remain the same even if no goods or services were produced. The most common examples would be rent and salaries. On the other hand, variable costs would be dependent on the number of goods or services you produce. The most common examples would be raw materials or inventory.

To obtain a better financial position, you need to use educated assumptions from your understanding of the business as well as making use of all the data you have at hand. Through proper budgeting and forecasting, you will be able to guarantee payment for your suppliers and employees on time as well as see early warning signs in case your company requires financial assistance before it is too late. If you encounter any sign that your company needs financial help, check out First Circle to get working capital financing that would help your business grow through fast, fair, and flexible financial partnership.

In a nutshell, appropriate bookkeeping practices and keeping close tabs on your company’s books will safeguard your financial position and give you several benefits such as getting more and bigger orders without worrying about lack of funding, strengthening supplier relationships by paying them on time, and extending payment terms with buyers without putting your company in jeopardy.

Need business financing today? Apply for one with First Circle by clicking here.

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