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PUBLISHED FRIDAY APRIL 23, 2021
Maintaining a healthy cash flow is essential for the sustainability of your business. This is essential for meeting your financial obligations, including payments for necessary business inputs.
A positive cash flow is also necessary to cater for the business’ immediate need. Your business should be liquid enough to maintain a reasonable level of inventory and procure its core inputs.
A positive cash flow makes you look good for credit facilities. Your business cash flow status is usually a major yardstick of your business’s credit worthiness for many creditors.
To maintain a positive and healthy cash flow, you have to focus on three things; receivables, payables, and inventory level.
In this article, we shall be talking about receivables and payables as the other item (inventory level) is less relevant for service businesses like yours – service businesses do not keep high inventory levels as sales of products are not core activities of the business.
At this point, it is noteworthy to mention that generating robust revenue and making accounting profit is essential; however, it is more important to manage your cash flow efficiently. You have to ensure that you collect cash in good time for every service delivered. Take, for instance, when you charge 20 clients $1,000 each for services rendered. You have to ensure that these transactions translate to $20,000 in cash. It should not be a case where a large number of clients delay payment for a service you already delivered.
Delay in cash receipts can kill your business. In a case where you have to be lenient with clients to attract more business, ensure you have few days of receivables outstanding. That is, your receivables should be tracked and collected in good time (the ideal time for a service business is seven days or less). Also, you need to assess the credit-worthiness of your clients objectively. This will assist in avoiding a large bag of bad debts.
A good way to entirely avoid delay in cash receipts is to use an online booking system that allows a seamless collection of payments just as your customers book their sessions. It is a win-win for everyone!
Every business has expenses, and vendors and suppliers. To have a positive cash flow, you need to delay payment to your suppliers. You should have a good bargaining power to negotiate credit terms with your suppliers. By doing so, you can easily extend your days of payables outstanding; in essence, you have enough time to accumulate sufficient cash to offset your bills.
Suppose your average days of receivables outstanding is seven days (as suggested earlier). It implies that you should be proposing ten days of payables outstanding with your suppliers. This gives you an additional three days to collate your cash and tidy up your receivables. You will also have the privilege to store up essential materials, which are crucial to sustaining the business in the immediate.
It is safe to conclude that tracking both payables and receivables is crucial to business sustainability and its overall growth and development. In that regard, you need a good software solution that will assist in providing you with timely information on payment received and expenses incurred. OClass Class Management Software is fitted with features that tracks both invoice payments and expenses. It presents them and other essential business metrics in a simple, yet well detailed form. In that way, you can maintain a healthy positive cash flow, while focusing on other vital business development activities rather than preparing your reports or tracking them manually.