Skills in managing finance, especially related to financial management of a business, are absolutely necessary. Generating high sales is an important achievement, but if the cash flow (cash flow) in your business is not well managed then the business will lead to bankruptcy. Understanding Cash flow or cash flow is the amount of cash out and in as a result of the company’s activities in one period.
Also Read: Types and Ways to Calculate Corporate Income Tax
The main thing that must always be considered in regulating cash flow is to clearly understand the function of funds or money owned. The money is to be saved or as an investment . In a simple function Cash flow is divided into three namely:
- Liquidity function, which is the funds available for the purpose of meeting daily needs and can be channeled in a short time without any reduction in initial investment.
- Anti-inflation function, namely funds saved to avoid the risk of a decrease in purchasing power in the future that can be channeled quickly.
- Capital Growth Function, namely funds intended for the addition or development of wealth with a relatively long period of time.
Cash flow related to business can be divided into three groups, namely:
- Initial Cash Flow: Is cash flow relating to expenditure for investment activities such as land, building and upfront costs. The initial cash flow can be said to be cash out flow or cash out flow.
- Operational Cash Flow: Operational Cash Flow: This is cash flow relating to business operations such as sales, general costs, and administration. Therefore operational cash flow is cash flow in or cash in flow and cash out flow.
- Final Cash Flow Terminal Cash Flow: Is the cash flow associated with the value of the project (residual value) such as the remaining working capital, the residual value of the project that is the sale of project equipment
But Cash flow has several limitations including:
- The composition of revenues and expenses included in cash flow is cash only.
- Companies only focus on targets that may be less flexible.
- If there are changes in the internal and external situation of the company that can affect the estimated cash inflows and outflows that should be considered. This will be hampered because managers will only focus on cash budgets such as unstable economic conditions and late customers in meeting obligations.
In addition to its use in preparing cash flow estimates in business, it is very useful for several parties, especially management, including:
- Provide all cash receipts plans related to financial plans and transactions that cause cash changes.
- Part of the basis for estimating funding needs for the future and estimating the repayment period.
- Helps menager to make financial policy decisions. For creditors to see the company’s ability to pay the credit given to it.
Tips for Maintaining Stable Cash Flow (Cash Flow)
Simply stated, cash flow must be carefully recorded. Errors in managing business cash flow can be fatal. Then managing and maintaining cash flow is to remain stable, healthy and safe must be done. Here are some tips that can be used to maintain the stability of cash flow in business:
Knowing Production Costs and All Expenses
Giving discounts is one of the most effective ways to attract consumers to buy or use a product. But if selling products below cost or production costs will certainly produce negative cash flow. So before giving discounts, know and calculate first how much the production costs of these products. After it is determined then you can calculate the size of the discount you want to give. This is done to maintain the stability of cash flow.
Using Bundling Strategy
Apart from giving discounts. You can implement a bundling strategy to attract consumers. You can offer a package by combining several products. For example, offering a lunch menu along with drinks at special prices. This strategy is much in demand by consumers because of its cheaper value. The success of this strategy depends on how management mixes a package. Bundling strategy will provide a slight increase in prices with high bargaining power so that it will keep cash flow stable.
Offer at a higher price
The amount of profit to be gained depends on how high the offer submitted to the consumer. To get a transaction with a large value, it is necessary to offer a large price as well. Thus consumers will bid at prices that are not too far from the price offered. What must be considered is knowing the applicable price standards. Do not set the price too expensive. Setting high prices for a particular product that is appropriate, sometimes makes consumers interested because they feel confident with the quality offered.
Encourage repeat purchases
If existing businesses focus on transaction volume, then encouraging repeat purchases is very important. Because sometimes you don’t get a profit on the first or second purchase. For that you must encourage consumers to continue to make transactions by offering a variety of interesting programs.
Pending purchasing inventory
The purchase of facilities is needed to improve business competitiveness. But if not done effectively will affect the stability of cash flow. The stability and security of cash flow must be a top priority. For this reason, a little delay in procuring inventory can keep cash flow stable.
Prepare a Cash Flow Statement
A cash flow statement is a part of a company’s financial statements produced during an accounting period that shows the inflows and outflows of money. To compile a cash flow statement you can follow the steps below:
- Determine the minimum cash
- Prepare estimates of revenues and expenditures
- Develop estimates of funding needs from debt needed to cover cash deficits and repay loans.
- Rearranging overall revenues and expenditures after a final financial transaction and cash budget.
In the cash flow statement the company will report the entry and exit of cash. The cash flow statement is divided into three parts, namely:
- Cash flow from operations, contains cash flow related to the company’s operational activities.
- Cash flow from investing, contains cash flow relating to investments made by the company,
- Cash flow from financing, contains cash flows related to financing companies to run their operations.
The sum of the three components is called net change in cash which will increase or decrease the previous cash position in the balance sheet. Basically, a healthy company will book positive cash flow from year to year. The company’s cash flow will look healthier if the amount of cash flow from operations can cover cash outflows from other parts.
Also Read: 6 Ways to Measure Cash Flow that Determines Your Business Success
Healthy cash flow from operatios generally amounts to almost the same as net income. By studying cash flow, you will immediately be able to take steps if there are a number of products that turn out to be unsold. If you are going to increase marketing, you have to sell discounts or even stop or reduce the production of these items for the next stage, and only sell items that are marketable. In the end, by monitoring cash flow you can find out the company’s liquidity position.
