Every business needs money, hard cash, but none more than a start-up. Maintaining and managing cash flow in and out of the organisation is very important, especially in the first few years of your business. If you can manage it during this period, one of the toughest spells is over.
If you are an SME in India, here are a few tips to keep in mind while successfully running your business.
- Find your breakeven point
Your breakeven point is that point in the projected future when your business starts to become profitable. Whatever the sales outcome, your fixed costs, like rent, overheads and salaries, remain the same. When your fixed and variable expenses equal your sales revenue, you are said to have broken even.
Knowing your breakeven point is critical to gauge the financial health of your business. Knowing when you can expect returns on the sales made versus when you have to pay the bills can help you determine if you will have cash to cover the payments or need to take an Business loan.
- Understand your working capital
Working capital for a business is all its current assets as well as current liabilities. It includes not just cash, but also equipment and inventory that can be converted into cash if need be. All expenses and debts that need to be paid in the next 12months are liabilities.
Maintaining a proper financial record helps you to stay on top of things, thus allowing you to take the right financial decisions at the right times. Billing your customers on time and keeping track of receivables will help generate cash flow. Be smart about inventory management. Invest in only enough for your immediate needs. Do not put all your money into inventory for products that will take time to sell. Your financial records will also help you understand if it is the right time to acquire an SME loan for expansion, and if you can make repayments on time.
- Carry out detailed ratio analysis
A ratio analysis shows the relation between a company’s net sales and cash flow. The number indicates the business’ ability to turn sales into cash. A high sales graph that is not partnered by an almost equal cash flow graph should be cause for concern. This indicator is an excellent way to gauge slowdowns in accounts receivables.
- Prepare monthly cash budgets
Instead of leaving cash flow to its own devices, a good business should invest some time in cash flow budgeting. Look at this as short-term financial planning. When you make a cash budget, you will know, in advance, the patterns of how cash flows into and out of your business. You can take into account specific periods of time, say monthly, quarterly or yearly. This should give tell you how much cash you should have for operations and for liabilities. It will also bring to your notice any idle money that is generating no returns.
- Factor for accounts receivable, inventory, accounts payable, capital expenditures, and taxation
If delayed payments are affecting your cash flow, affecting your day to day operations, you can ‘sell’ your outstanding to a factoring company. Raising finance through this method helps you in two ways: you can release the pressure of having to collecting on your receivables, and you also get the value of your capital that is currently tied up in your sales ledger.