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Jan 05

How Steady Cash Flow Helps Businesses and Online Sellers

Reading Time: 5 mins

Cash flow is simply the movement of money from sources outside the company, to the business’ coffers and out to third parties that the enterprise owes money to. This movement determines whether the business is earning profits, is breaking even, or losing money. Carefully studying their business’ cash flow can help entrepreneurs avoid that which they fear most – failure.

It’s not enough to simply set smart goals for the business. Business owners have to work on ensuring a steadily positive cash flow as well. A steady cash flow is the only means through which they could attain those goals that they have set for their business.

Here are some of the benefits that a steady cash flow could make possible for any business, whether large companies, startup businesses, or online sellers.

 

Steady Cash Flows Bring Potential for Business Growth

Every entrepreneur aims to not just start a business but to also grow it in terms of assets and revenues.  Ensuring a steady cash flow throughout the life of the business can make consistent growth possible. Having enough cash reserves can help entrepreneurs ensure that any growth, whether small or drastic, is sustainable.

While desirable, managing business growth can be very challenging for any entrepreneur. Growth always comes with increased expenditures that could turn your cash flow negative. There are, of course, various factors behind this including accelerated yet mismanaged growth, ineffective business management, and mistakes in investment during the expansion.

All of these serve to highlight the importance of positive cash flow management and keeping the flow steady. A steady source of income during the shaky growth phase will keep the business afloat despite the negative cash flow, and also help the business qualify for financing to correct cash flow problems.

Together with cash flow, entrepreneurs can also manage the risks of growth and expansion by subscribing to enterprise risk management software.

 

A Steady Cash Flow Gives Way to Better Inventory Management

Inventory is vital to an e-commerce merchant. Orders come in 24 hours a day, 7 days a week. Online sellers can suffer a lot of losses if they run out of stock. Unfortunately, they can only update their inventories if they have enough cash flowing into their reserves, and not out towards expenses. Having an erratic cash flow also hampers any business’ ability to purchase new inventory on time.

There are financing options like purchase order financing to help out in this situation. However, the entrepreneur needs to demonstrate to the lender that they have consistent profits and a solid cash flow to qualify for these loans. No lender will want to extend financial assistance to a business whose cash flows are unpredictable and unsteady. If they do take the risk, they’ll also protect themselves by charging high interest rates.

 

Businesses Can Retain Its Range in the Market

E-commerce is a very competitive market, and only those sellers with consistently positive reputations can come out on top. Customer service is the biggest factor in reputation management, and order fulfillment is a component of this.

As mentioned earlier, a steady cash flow can prove crucial to the enterprise’s ability to keep up with demand and maintain a well-stocked inventory. With enough stock on hand, the business can speedily respond to orders. Customers are very particular about turnaround time but, with enough stock and effective inventory management, online sellers can maintain a positive reputation and stay ahead of their competitors.

 

A Stable Cash Flow Keeps Businesses Ready for Emergencies

The pandemic has highlighted the effects of a sudden catastrophe on an already volatile environment. Businesses that were already plagued by cash flow problems shut down after the declaration of lockdowns and were unable to return. Some of those that did remain operating struggled with further cash flow woes until they also had to close down their doors.

Innovation kept the remaining businesses in place despite the ongoing crisis. These included restaurants that continued to cater to their customers’ needs by introducing delivery services. Brick-and-mortar shops adapted by allowing customers to pay through digital wallets. However, all of these were only possible through effective cash flow management both after and through the COVID-19 pandemic.

In other words, these innovative businesses exercised effective cash flow management before and through the pandemic. These actions ensured that they had enough cash to dip into to keep their business afloat when the pandemic hit.

 

Effective Tips for Keeping Cash Flow Steady

A steady cash flow may be challenging given the inherently unstable environment that most businesses operate in. However, it’s not impossible. Entrepreneurs can keep their enterprise’s cash flow stable by simply following the tips below:

Scale Up Collection Practices

One of the reasons a business has cash flow problems is because its money is tied up in pending invoices. This can be remedied by taking up financing options like invoice financing, from which they can advance money against their accounts receivables. However, not all invoices can be financed. Invoices owed by customers with bad credit records are more than likely to be declined by the lender.

This means that the business owner must learn to strengthen their company’s collection practices. A firm collection practice will ensure that customers pay on time when they’re due. Not only does this generates hard cash for the company, but it also demonstrates a positive attribute to potential issuers of financing products.

Pay Obligations On the Due Date Or as Close to It As Possible

There are several reasons why paying on the due date is more advantageous for a business than paying in advance. One reason is that it preserves some cash flow that the business owner can divert to other expenses that might be more pressing. For instance, it allows entrepreneurs to prioritize employee salaries.

Another reason why this makes sense is that, in the context of loans, some creditors charge penalties for early payment. The money that goes into penalties is better off flowing into the company’s operating expenses like salaries and utilities.

Of course, business owners should always stick within the constraints laid out in their contracts with suppliers and lenders. Stretching cash flow beyond the dates in these agreements could result in expensive lawsuits or asset seizures, both of which are counterproductive.

Step Up Marketing Efforts

Despite its importance to the revenue earning process, marketing is also the most neglected process of a business. Small businesses in particular tend to allocate a lesser amount of their budget to advertising. Assigning a very dismal amount of money to marketing, however, shuts a business out of various opportunities.

There’s no cash flow without revenues, and there are no revenues without marketing. Customers have to be aware of what offerings are waiting for them in the market. According to the Small Business Administration, a company earning less than $5 million in gross sales every year should set aside around 8% of its revenues for advertising.

Regularly Monitor Your Expenses

Uncontrolled expenses can siphon a lot of money from the business that should otherwise go into reinvesting or the company’s cash reserves. Aggressive marketing and promotional events are for naught if the business is unable to control its expenses. The only way to make sure that the cash is flowing meaningfully for the enterprise is by regular monitoring of its expenses like ERP software systems.

The goal of monitoring is to spot which expenses are diverting a significant amount of money from the company instead of towards it. Identifying these expenses will help in highlighting which ones can be eliminated and which ones can be reduced. Both of these actions can free up parts of the business cash flow and steer it towards a positive figure.

Having a steady cash flow is crucial for businesses of all sizes, from large corporations to small-time e-commerce merchants. It means more than just a steady stream of revenues coming from customers or clients to the business. It also means effective management of each dollar that goes out towards the business’ obligations and operating expenses.

Companies with steady cash flow are more likely to weather any drastic changes in the current landscape, like the ongoing COVID-19 pandemic. The skillful management of their revenues and their expenses keep their cash reserves sufficient to hedge them against the adverse effects of a major catastrophe.

 

Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.

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