Factors That Affect Cash Flow: What You Must Understand
Cash flow is one of the primary indicators of your business’s performance. To keep your business functioning, you must know how much money comes in and goes out. Likewise, you must understand your profits and losses, debts, and tax amounts. Similarly, you might want to adjust your expenses or increase your revenue to meet your quarterly or annual goals.
Simply stated, the cash flow for any business is the measurement of the amount of money that comes in or goes out in a defined period. To maintain a functioning business, there must be a positive cash flow.
Now that you know what cash flow is and what its significance is, let us understand the key factors that affect cash flow.
One of the primary factors that affect cash flow is delayed payments. You are likely to offer some time to your customers to pay you back. However, if the payback time exceeds two to three months, then your business can be in trouble. With negative cash flow, you will not be able to pay your own bills or debts.
To avoid this situation, you must design the payment terms and conditions and have it signed by both parties during a sale. Likewise, the terms and conditions must include the payment deadline and penalties in case the deadline exceeds. Similarly, including discounts for early payments can encourage your customers to pay on time.
Furthermore, leveraging the power of automation can speed up receiving payments. If you accept a wide range of payments like cards and digital services, you can get paid in seconds.
Bad debts are also one of the major factors that affect cash flow. If there are several customers or borrowers who are not able to pay you back, your revenue is significantly reduced. Recovering these debts should be a priority but it is still not guaranteed that you receive those payments.
To avoid bad debts, you must spot the warning signs early on. You must be able to walk away from clients who have a poor track record. Look for reviews on their websites and keep a close eye on their performance.
Your business is likely to make most of the revenue from sales of goods and services. A decrease in sales means a decrease in your revenue. There may be several reasons why your sales are decreasing. Your product is outdated and new technologies are growing dominance in the market. Your competitors have designed a better solution at a lower cost. Businesses might have been hit with crisis and financial troubles and are no longer to afford your services.
To keep up with the pace of evolving markets and customer demands, innovation and improvement must be your top priority. You may use the power of data analysis to understand your customer and their buying behaviour. Likewise, with digital marketing, you can advertise your products anywhere in the world. Simply stated, if your business is not powered by technology in this day and age, you are very likely to be thrown out of the competition.
If the cost of running your business is very high, it is likely that it will go down. Your business needs to spend on a lot of things to keep it functioning. Wages and rent may be your primary expense. Likewise, you might be paying for assets like furniture and computers. Furthermore, utility costs like electricity, telephone, and the internet can add to a large overhead cost. Moreover, technology has become an integral part of every business. You are likely to pay for software subscriptions, payment gateway services, website maintenance, and digital marketing.
To maintain a steady positive cash flow, you must keep a close eye on your expenses. You must look for areas where you can cut your expenses. Automating several parts of your business can save labour costs. Likewise, adopting paperless transactions will cut printing and paper costs. Similarly, making wise use of electricity is good for your business as well as the planet.
How Can We Help?
From this blog, we have learned the major factors that affect cash flow and how you can manage them to keep your business functioning.
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