Managing your financial position is as important as keeping your business alive. Having liquid cash—cash that is easily and readily available for use—supports a considerable chunk of business operations, including:
- Payment of supplier’s account
- Payment of debt
- Payment of salaries
- Purchase of inventory and raw materials
While it is important to keep the business profitable, all your efforts will go down the drain when you fail to manage your cash flow properly—inflow and outflow.
How important is managing financial performance?
Business operations are highly dependent on the healthy inflow and outflow of cash. In fact, according to a study by the U.S. Bank, one of the largest banks in the U.S., 82 percent of businesses fail because they fail to manage cash properly.
It is safe to say that improper cash management and negative cash flow might be the final nail in the coffin for a business, and managing your financial position will make or break your operations.
Ways to improve the financial position
There are several ways to improve your business’s financial position and finally achieve your 2023 money goals for your business, including:
Many businesses often fail from the get-go, not because of the lack of revenue but the uncontrollable costs incurred by the business.
Managing expenses means letting go of costs that:
- Do not add value to the business
- Are not necessary to improve product and performance quality
- Can be replaced by cheaper substitutes without sacrificing quality.
Managing business expenses also means being smart about the things you spend your finances on. This includes investing in reliable technology, employing part-time and freelancers, keeping variable costs to a minimum, and avoiding stocking up on unnecessary inventory.
Avoid interests and surcharges
Surcharges and interest are among the most unnecessary and avoidable costs that businesses should keep at a minimum.
Some of the most common sources of surcharges and interests include:
- Late filing and payment of taxes
- Late payment of outstanding debt and line of credit
- Failure to apply for necessary permits and licenses
To avoid these penalties, here are some important tips and reminders:
- Get a free EIN number before starting your business
- Religiously pay your line of credit and business credit cards on time by creating debt payment schedules
- Pay the correct taxes before the deadline to avail of discounts
- Know what kind of permits and licenses are required for your business
Forecast your cash flow
The key to improving your business’s financial position is intelligently forecasting the inflow and outflow of cash for a certain period.
Forecasting means that you have a general overview and prediction of sales and expenses to be made, which can be derived by studying the revenue patterns month by month and year by year, making assessments and projections of yearly increases or decrease in sales.
At the same time, cash flow forecasting also includes setting up a budget for expenses and costs for a month or a year—and sticking to it.
When you can forecast your sales (increase or decrease) accordingly while maintaining and sticking to your budget based on those projections, you’ll find yourself in a more favorable financial position.
Encourage customers to pay early.
Accounts receivable are detrimental to improving your financial position. Some businesses can’t do cash-only transactions, and offering credit promos and paying on account encourages more sales.
When you have huge outstanding and overdue accounts receivable, an accounts receivable turnover ratio will tell you how well you manage credit extended to your customers. A bad (or low) accounts receivable turnover ratio can adversely affect your cash flow, as it means you cannot collect payments that are supposed to support healthier cash flow.
To encourage customers to pay early and improve their financial stand, impose strict penalties for late payments or offer multiple payment methods or discounts for early payments made within a certain period.
Take advantage of bank loans
When making huge purchases or investments, you may want to consider taking out a bank loan instead of taking a huge chunk of cash from your current assets.
While many people think taking out loans is a dangerous game, it is only so when you take out a bank loan for no specific purpose or investment or fail to look for the best bank for your business loan needs. For example, taking out a bank loan to supplement day-to-day operations will increase your expenses (due to debt repayment costs) with the possibility of not increasing your sales at all.
Otherwise, taking out a loan for an investment, to start a business, or as a means to purchase an asset that would generate considerable returns is a great way to leverage your debt without sacrificing your cash flow.
Dispose of unused assets
Asset disposal is the process of removing an unused and long-standing asset from the company books, usually by selling or scrapping it.
There are multiple reasons why a business or company may want to dispose of an asset:
- When it has no use
- When it is fully depreciated
- Other reasons why it must be necessary for it to be removed from company books
For cases one and two, business owners may gain cash value from disposing of these assets that are otherwise not used or fully depreciated—either through a gain from the sale or a residual value amount.
Disposing of assets for cash value gives the business additional cash flow and frees up space for new assets and inventory.
A healthy financial position is key to maintaining going concern
The going concern principle assumes that a business will remain to exist in the foreseeable future. This means that a business should be liquid enough to settle its outstanding debts and support day-to-day operations without the threat of liquidation or bankruptcy within the next 12 months.
For this reason, business owners, especially for the first few months of operations, need to be thoroughly cautious of their financial position. A healthy financial position means that a company will have enough cash for its continuity, maintain smooth sailing operations, and achieve both short-term and long-term business goals for the owners and stakeholders.