In today’s complex business landscape, businesses need to have effective cash flow management to help the business stay afloat. Indian companies and businesses often ignore the importance of effectively managing cash inflow and cash outflow to stay ahead of the curve and keep their business functioning without day-to-day operational hassles.
Thus, having a cash flow plan is integral for all business and should not be underestimated. This article will help businesses understand cash flow blunders Indian businesses need to steer clear of.
Role of cash flow in financial management
Before understanding the cash flow blunders Indian businesses need to steer clear of, we must understand the role and importance of cash flow in financial management. Cash flow has 2 components Cash Inflow and Cash Outflow.
- Cash Inflow: Money coming in through sales, investment or loans
- Cash Outflow: Money going out through purchases, interest payment, rent, salaries etc.
Every Indian Company and business must understand the role of cash flow in financial management and setting up an effective cash flow plan to help in Cash Flow Management. Businesses of all sizes and industries require to take conscious efforts to help establish adequate cash flow plans.
Common Cash Flow Blunders Indian Businesses Need to Steer Clear of
Absence of Proper Cash Flow Plan: Indian companies and businesses often think that cash flow will take care of itself. But this is one of the biggest mistakes. Businesses need to take conscious steps to draw up a comprehensive cash flow plans periodically, Monthly or Quarterly. This is done to forecast, plan and predict future cash inflows and cash outflows to pre-emptively take corrective steps to take case of any future problems and avoid last minute surprises. It is better to be safe than sorry and this applies to drawing up a cash flow plan too.
Ignoring timings of cash inflow and cash outflows:Simply predicting the amount of cash inflows and cash outflows is not enough. Businesses need to keep check of the timings of the cash flows to help in financial management. This becomes a bigger problem in todays time when the payment cycles get extended due to delays. In a situation where you supplier wants payment within 15 days but you will receive payment in 45 days, such a situation is an alarm for disaster. Hence, businesses need to effectively synchronise the timings of their cash inflows and cash outflows.
Overestimating the Revenue and Underestimating the Expenses: Businesses often fail to adequately predict the amount of revenue and expenses. Businesses must remember the basic accounting Prudence Principle which dictates that businesses must account for future losses & expenses and not be over optimistic regarding the future revenue and profits. Basically one must follow a pessimistic and realistic approach in predicting their revenues and expenses to help in cash flow management. Indian companies must always maintain a cash flow buffer.
Poor Inventory Management: Dead stock and poor inventory management could lead to the end of a businesses. Thus, businesses must correctly estimate the demand and supply of products and avoid maintaining unnecessary stock thereby leading to cash flow management. This heightens the chances of entering into a financial crunch with money being stuck in the form of dead stock especially in the FMCG sector.
Delayed Invoicing and Collections: This is a very common yet easily avoidable problem faced by Indian companies. Businesses must aim to shorten their payment cycle as much as possible to ensure regular inflow of cash. Delays in invoicing and collections unnecessary put a burden on the business and disrupt their cash flow plan and cash flow management.
Uncontrolled Credit Sales: A fewcredit sales here and there do not impact the businesses that much, but continuous credit sales in an uncontrollable amount can but hazardous for any businesses. Indian companies must constantly keep a check on its credit sales and try to minimize them. Even when offering credit sales, businesses must clearly establish the grounds and limitation for payment expressly, preferably through a written agreement.
Neglecting Tax Obligations: Businesses must not forget their tax obligations as ignoring GST, TDS and other tax obligations can lead to hefty fines and penalties. If businesses are unprepared for such tax obligations, it can disturb their entire cash flow management. This is another major cash flow blunder to avoid in Indian businesses.
Tips to improve cash flow management in Indian companies
- Maintain a contingency/buffer fund to help in cases of uncertain situations or cash flow crunch.
- Make sure to make quarterly or monthly cash flow plans.
- Minimise credit sales. Even in cases of credit sales, ensure that the terms are in writing.
- Ensure that the payment cycle is as short as possible.
- Follow Prudence Principle during cash flow management.
- Synchronise cash inflow and cash outflows on a business.
- Make sure to avoid the problem of dead stock by predicting demand.
- Do not forgot tax obligations.
Why role of cash flow in financial management is important more than ever?
In a dense and competitive market like India, businesses must pay more importance to cash flow management and formulating an air-tight cash flow plan. This will protect businesses from any future unpleasant surprises and problems.
More so, all investors, partners, businesses, suppliers look at cash flow statements during onboarding. Hence, it is now more than ever, it is super essential that cash flow blunders to avoid in indian businesses.
Conclusion
One of the main signs of a sustainable and thriving businesses is that a business has an effective cash flow plan and cash flow management. It is not difficult to do so, but it for sure requires conscious and consistent steps in the direction starting from preparation of periodical cash flow plans, to predicting demand, to synchronising cash inflows and cash outflows.
A robust cash flow will help the businesses take on all its challenges, projects, onboard investors, clients, secure loans etc. So whether you are a start-up owner or a big Indian company owner, effectively managing cash flow is the answer to half of your business problems.
