In accounting terms, cash flow depicts the relationship between the funds coming into your business and funds going out of it. To generate a positive cash flow, you need to minimize expenses and drive in more revenue. Cash flow works as the lifeline of any business. However, poor cash flow is still a key financial aspect for most of the business startups, established, as well as, medium-sized businesses. The aspect to consider here is, how do businesses get to generate positive cash flow?
Below are some of the vital aspects that businesses must take into account to generate a positive cash flow for their venture.
Stay Robust with Product Sales
For a product manufacturer or a merchandise resale company, product sales prove to be a key driver of both cash flow and revenue generation. Manufacturers and wholesalers generally sell on account, which delays timely cash flow. In the retail sector, cash flow is more associated with revenue. Customers opt for goods in the retail stores and pay for using the product using cash or card or by mobile payment. The sale helps generate cash flow for the business and this improves cash flow generation by providing customers pre-ordering on the in-demand items.
Good performance in Service Sales
One other typical driver that leads to a positive generation of cash flow in the service-based and retail industry is service sales. For instance, when a hair salon sells a hair package to a consumer, it generates cash flow at the time the consumer purchases the package. One approach to boost service cash flow is to provide consumers with follow-up services after they have purchased and tried the product at least once. A vital example of this structure is the standard car dealerships that sell a client a car and then generate follow-up cash flow from usual repairs and oil changes.
Take Your Accounts Receivables Seriously
Manufacturers as well as wholesalers generate cash flow with the sales that take place on their account, but it takes a bit longer to result. If you are selling supplies on your account today, you do not generate cash flow till the time your customer makes the payment. In some cases, customers never get to pay on accounts and you are required to write off the balance as bad debt. Maintaining strict payment policies, like cash discount on early payments and penalties on late payments, help boost the efficiency with which businesses get to generate positive cash flow on account payments.
Effective Budget Planning Plays a Crucial Role
To generate positive cash flow, businesses need to carefully plan out where their funds go. If proper budgeting is done, businesses can keep their expenses lower than their revenue. Assuming that businesses are being able to collect on accounts efficiently, they are able to generate a positive cash flow as revenue exceeds expenses. Maintaining positive cash flow even snowballs as you can use the cash flow to invest in various other revenue-generating activities. This helps businesses minimize interest charges on debt balances especially if you stay within your budget.