From a small street food kiosk to an international food franchise, a business venture is more than a dream; it’s an investment. Putting it up requires extensive preparation and meticulous monitoring to ensure its smooth sailing—even through the unpredictable waters of the economy.
In the Philippines, effective cash flow management is a top concern for businesses, regardless of size. An overwhelming 77% of micro, small, and medium-sized enterprises (MSMEs) face challenges in securing adequate funding or any funding at all. Given the difficulties in obtaining capital, managing cash flow effectively becomes fundamental when starting a venture.
If you’re eager to discover what cash flow is and how important cash flow management is in doing business, you’re in the right place! This article will discuss how to masterfully prioritize, negotiate, and manage your cash flow, ensuring your business survives and thrives.
What is Cash Flow Management?
Cash flow management is the tracking of money movement, monitoring incoming funds against outgoing expenses like bills, payroll, and property costs.
According to Renz Estrella, President of Zenith Capital, effective cash flow management is “essential for sustaining and growing a small business, especially when considering capital loans as part of the strategy. It ensures meeting financial obligations, repaying loans on time, seizing growth opportunities, mitigating risks, and building credibility with lenders.”
The crux: good cash flow is not just about keeping your business lights on. It’s about ensuring sustenance and growth. Business loans often emerge as a valuable solution when maneuvering through financial hurdles like the ones listed below.
5 Common Cash Flow Management Challenges for Small Businesses
Navigating your cash flow landscape can be treacherous as you grapple with various business challenges that demand strategic financial stability and growth solutions. Here are a few worth taking note of:
1. Seasonal cash flow fluctuations
Slow seasons are normal in business. In retail, for instance, the initial months of the year generally mark a period of reduced activity. Following substantial expenses during the holiday season, some consumers might experience a sense of melancholy upon receiving their January credit card statements.
2. Unforeseen expenses and emergencies
Unexpected costs can strain your cash flow, highlighting the importance of having a financial business plan to handle unforeseen challenges. The common rule of thumb suggests that businesses should maintain a cash reserve equivalent to three to six months’ operational expenditures.
3. Inventory management challenges
Staying on top of business inventory is a key principle, especially in the retail industry. Poor inventory management can tie up funds in excess stock or lead to shortages. This is why optimizing inventory levels ensures you use resources efficiently, minimizing shortages and overstock.
4. High debt and loan obligations
Business loan use varies on your needs. Some can cover payroll, expansion, and debt refinancing. However, excessive debt and loan repayments can drain your cash flow, limiting your ability to invest in growth initiatives or manage day-to-day operations effectively.
5. Lack of budgeting
The business world is about circulating money, supplying demand, and building wealth. Growth isn’t possible if you don’t know how to handle your business financing. Poor budgeting can lead to overspending, causing cash flow shortages that hinder short-term and long-term financial stability.
5 Strategic Cash Flow Management Tips When Working with a Capital Loan
Knowing how to harness the power of strategic cash flow management can help you optimize your strategy. The techniques below ensure your working capital loans address immediate needs and set the stage for sustained growth and financial stability.
1. Diversify your revenue stream
For small businesses, immediate expansion might be challenging. Limited connections can hinder market entry, potentially leading to losses. Creating diverse income streams can help support ongoing expenses and stabilize your small business.
Estrella emphasized this, “Aim to diversify revenue streams to reduce reliance on a single source of income. This can involve expanding product/service offerings or targeting different customer segments, making the business more resilient to market fluctuations.”
A capital loan can support this diversification effort by providing the necessary resources to launch new initiatives or expand into untapped markets.
2. Forecast your cash flow
Estrella also advised to “factor in unexpected events in your forecasts. Create contingency plans to handle potential disruptions to your cash flow, such as economic downturns or delays in receiving payments.” Knowing how to manage cash flow and anticipate potential shortfalls or surpluses comes easily with a contingency plan.
He added, “There are various cash flow management tools available that can help you create and manage your cash flow forecasts. These tools offer automation features, data visualization, and scenario planning capabilities.” They enable proactive decision-making to capitalize on opportunities or navigate challenges within your cash flow cycle.
3. Project the demand for your products
When formulating a sales projection, Estrella suggests analyzing your historical data. “Start by analyzing your past cash flow data. Look for patterns, seasonal trends, and any other relevant insights. Historical data can provide valuable information for more accurate predictions about future cash flows.”
Estimating future demand for your products helps align production and procurement with actual sales, avoiding overproduction and excess inventory costs. Accurate demand projections enable you to allocate resources efficiently, ensuring your cash flow remains optimized.
4. Negotiate with your customers and suppliers
Effective negotiations with clients and vendors can yield mutually beneficial outcomes. Estrella advised businesses to “keep a close eye on accounts receivable (money owed to you) and accounts payable (money you owe). Delayed customer payments or extended payment terms to suppliers can significantly impact your cash flow.”
Likewise, he noted, “When considering capital loans, negotiate with lenders for favorable terms, including interest rates and repayment schedules, to minimize the strain on cash flow.” Negotiating better payment terms can align outgoing expenses with incoming revenue.
5. Prioritize your expenses
Financial challenges often contribute to business failures, and ineffective expense tracking is a major factor in cash depletion. While expenses are necessary, you must monitor and prioritize them. Business cash flow loans allow you to manage priorities, maintain operations, and invest in growth.
However, Estrella advised, “While capital loans can provide necessary funds, it’s essential to borrow responsibly and manage debt conservatively. Only take on loans when needed and ensure they align with the business’s capacity to repay.”
Master Business Cash Flow with Working Capital Loans
Effectively manage your business’s cash flow, from knowing what cash flow management is to understanding industry tips to avoid business financing problems. Your company will strive toward financial resilience and growth through implementing forecasting, prioritization, and negotiation strategies.
Estrella concluded, “By adopting these strategies, small businesses can build a robust financial safety net, reducing vulnerability to unforeseen events and capitalizing on growth opportunities.”
Now, it’s time to take action! Empower your business with these proven techniques and unlock the potential for stability and expansion. If you’re ready to take the next step, don’t hesitate to contact a lending company in the Philippines like Zenith Capital.
Rizza Templonuevo is not just an accomplished finance professional and business leader, but also a loving wife and a dedicated mother of two. With a passion for helping businesses grow and thrive, she brings her extensive knowledge and expertise as Vice President of Zenith Capital Credit Group Corporation to help countless SMEs and corporations across the Philippines access the financing they need to succeed.
When she’s not busy with work, Rizza enjoys immersing herself in the worlds of fashion and social events, as well as traveling to new and exciting places.