- November 16, 2016
- Posted by: Chowdhury Shahid Uz Zaman
- Category: Finance
Liquidity and cash flows are central to every business, corporate financial management is essential to guarantee the company the necessary funds to operate at its best.
Small and medium-sized enterprises, especially in recent years of crisis, suffering particularly the poor financial management, poor corporate liquidity and cash flows mismanaged.
5 are the mistakes most frequently by SMEs: more or less damaging mistakes that, over time, can also seriously affect the performance of a business.
# 1 – Be based on inaccurate data
To manage and increase the liquidity you need to perform a continuous analysis based on accurate and complete data on:
- Sales (data that should not be understood as simple lump sums, but determined by the actual sales of products and services made in the past, or estimated for the future based on the average value of the receipt / purchase multiplied the number of sales expected);
- Variable costs (costs that vary depending on the quantity of goods produced or handled and should be assumed based on your sales forecast);
- Fixed costs (permanent costs that, if during the work does not take over significant changes, can be recovered from previous financial statements).
With this same information you can get a significant prediction of cash flows in and out.
# 2 – Do bad investments
The good management of cash flows means, among other things, paying for goods purchased for the company within a period of no more than the life cycle of the same.
If, for example, you buy 100 business cards to be delivered to all of next week fair, will agree to fork out the full amount at once. But if the activity serves a very expensive machine that should work for at least 10 years, then it will be better to return the money of the loan in an equal period of time but never higher.
Another good tip is to maintain good relations and frequent with your bank manager, always updating it on about the company financial news. In this way, it will be easier to obtain economic support in case of need.
Warning: If you assume in the future the need for a loan, it is better to ask in advance so as not to come when you need to beg for money or accept inconvenient conditions.
You may also like to read another article on Heygom: Corporate risk management: Tips to prepare for the worst
# 3 – Do not understand the difference between profit and cash flow
A good rule to improve the financial management of the company is to understand perfectly the difference between profit and cash flow: if the profit is the difference between the total revenue from a product and its total cost of production, cash flow, or cash flows instead represent the reconstruction of cash flows (difference between total revenue and cash outflow) enterprise.
The analysis of cash flows is therefore a further step that allows you to include in the analysis factors such as receivables, inventory, payments to be issued, as well as information related to the balance of any loans etc …
Understanding this difference is so essential to a more flexible optimization of the management of corporate cash flows.
For example, a company can have great profits, but to be in trouble with the cash flows because the receipts arrive late compared to payments.
# 4 – Focus only on cost reduction
Those who want to increase the company’s liquidity, more often, make the mistake of focusing more on cost reduction than on the effective opportunities for revenue growth.
The cost analysis and reduction of these is definitely important but at the same time limiting since the costs cannot be less than zero while revenues potentially can grow indefinitely.
An all too common mistake that can be avoided, fully understanding and making the most of the so-called driver of revenue related to:
- Number of clients acquired;
- Number of times that customers make a purchase;
- Average expenditure / average ticket per customer.
Properly managing these drivers it is possible to greatly improve the company’s liquidity avoiding the most common side effects of the cost cutting.
# 5 – Record the performance of a spreadsheet
If the cash flows are, for example, recorded by hand or on simple spreadsheets, in addition to making the seal and the more complex analysis, will increase the risk of committing oversights and errors is very high.
The easiest way to avoid such problems, it is certainly to use an accounting software that helps to improve the financial management of the business by streamlining operations to be carried out in everyday life and also facilitating the intervention of the accountant.
This is our list of the 5 errors related to liquidity and cash flows more committed by small and medium-sized enterprises: to recognize and avoid common mistakes before you compromise the proper conduct of its business.