SME - How to Take Control of your Cash Flow

By: Boris_Dzhingarov

If your business is concerned with investments or trading then there are a number of checks and balances you need to put in place in order to manage your cash flow. It’s well known that cash flow is one of the most vital and critical elements in the smooth running of a small or middle-sized business. If your enterprise is unable to manage cash effectively, you will be unable to invest in what your business needs and you may lose out. Check out this selection of things you need to have under your control:

Tracking

As cash flow is the movement of funds in and out of your business, you should ideally be tracking this on a weekly, monthly or quarterly basis, depending on the scale of your enterprise and your invoicing policy. You have to work at achieving a positive rather than a negative cash flow – it won’t happen all by itself. Analyse how your cash comes in and goes out and establish a framework, so that at the end of each financial cycle you know you have sufficient cash to cover financial commitments due the following period.

Good financial management

You can use accounting software packages designed for your size of operation that can help you produce cash flow statements so it’s easy to check progress regularly. You can also opt for a free invoice template that will not only give your business a professional identity but also ensure you bill clients regularly and get paid on time.

Growth is often considered as the solution to a cash flow issue, but beware of growing too much, too quickly, as small trading organisations and investment entrepreneurs can find that in the process cash flow problems also grow. It’s important to plan for growth in advance, as this encourages you to ensure you have a positive cash flow with sufficient funds to take care of your additional investments as you expand your operations.

Risk awareness

It’s worth bearing in mind that all investments carry some degree of risk, including bonds, exchange-traded funds, mutual funds and stocks. All of these can lose value if market conditions become difficult. Even if you are relatively risk-averse and opt for investments that are insured, such as certificates of deposit (CDs) that are issued by a credit union or a bank, these more conservative choices come with the risk that inflation might alter their value.

Average values over lengthy historic periods can be useful for guiding your decision-making about likely levels of risk. However, a particularly tricky aspect of controlling your cash flow, even if you hold investments in a wide portfolio of stocks for quite an extended length of time, is that you have no guarantee that the rate of return will be equivalent to your expectations.

This fact alone can make cash flow control difficult for investors. Beware of buying, for example, when a particular market is at a peak, as it is likely to then go into decline, swallowing your potential profits and perhaps resulting in a negative cash flow. Always take professional advice when considering new investments in untried markets.

Market and trading trends

Keeping an eye on expert advice can help when it comes to making investment decisions. For example, in terms of commodities, silver has been weaker than gold recently and indeed has had a long-term, seven year downward trend. Analysts, however, are starting to predict that the market may well rally before too long, so further investigation may well be useful if you are planning to bolster your enterprise’s cash position.

Currency trading has long been popular, especially among newer investors; commentators however have warned that there have been many surprises during 2015 and that investors should remain cautious. There was a short-term rally in the Euro/USD at the beginning of December 2015; analysts however predict that this is not likely to occur again for some time, so building an inflated price into your forex trading cash flow is probably not a good idea.

Much has been said and written about the housing market in London, and there is speculation that the current bubble will last until at least 2018. Reports suggest that even the professional middle classes are unable to afford London property prices, and some commentators advocate buying property in run-down cheap areas on the basis that they will be up and coming in future years. However, this might be a case of ‘buyer beware’ as there are also many empty and redundant buildings in London, and with this type of investment there is absolutely no guarantee of turning a quick profit, let alone achieving a positive cash flow.

Know your industry

In terms of general cash flow management, a little bit of common sense can go a long way. For example, retailers expect there will be a surge in sales before Christmas and during the January sales. In the same manner, if you are trading or investing in a particular area, you should be able to anticipate the highs and lows, and at the very least get some professional help to do so if you are a newcomer.

It also pays to anticipate ways in which you can improve cash flow. Negotiating payment dates with suppliers might help a business to pay in instalments or at a later date; this eases cash flow and helps you to predict your outgoings more accurately. In the same way, if you can minimise interest on borrowing you will move towards a stronger financial position, bit by bit.

Finally, as you begin to build your business, whether by adding to an investment portfolio or increasing your trading activities, track your income to establish if you are gaining a little more cash during each cash flow cycle. Always prepare for possible future shortfalls as part of your overall business strategy so that you are never faced with a situation where you don’t have sufficient funds to pay your creditors. If this happens, you are moving towards negative cash flow and you need to pay attention to that red flag.

By Boris Dzhingarov

© 2015 Copyright Boris Dzhingarov - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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