Understanding cash flow as a business owner is essential for survival. It’s as vital to your business as blood is to the body. We will follow Sarah, a popular Instagram wig vendor in Lagos who learned this lesson hard. Despite having thousands of followers and regular orders, she could not restock her bestselling bone-straight wigs because she hadn’t mastered how money flowed through her business. Let’s explain what happened and how to avoid such an issue.
But first, what is Cash Flow?
Cash flow is the movement of money in and out of your business. Think of it as monitoring your business’s ‘pocket’ – tracking how much money comes in (revenue) and how much goes out (expenses). It’s different from profit because while you might be making sales, the actual cash might not be immediately available in your account.
For instance, if Sarah sells a ₦150,000 wig on credit to a customer who promises to pay in 30 days, that sale counts as revenue, but it isn’t cash flow until the money hits her account. Meanwhile, she must pay her suppliers, handle shipping costs, and manage other expenses within those 30 days. Except she has a similar agreement that allows her to delay those expenses, her cash flow is likely negative.
Why is a good Cash Flow important for my business?
- Business Survival
We all know how much of our economy depends on foreign exchange, and any fluctuations can affect import costs overnight. Having a healthy cash flow helps you adapt quickly. Sarah learned that maintaining strong finances meant she could promptly restock when her suppliers increased prices due to dollar rate changes. She didn’t have to take loans just to stock up. She couldn’t easily roll with the economic changes.
- Growth Opportunities
You can seize business opportunities with good cash flow without relying on high-interest loans. If Sarah spots a chance to buy premium wigs at wholesale prices – without a healthy cash flow, she might miss out on this opportunity. You have probably missed out on such opportunities because you had too much money in the hands of debtors or inventory.
- Operational Stability
Another reason good cash flow is important is that regular expenses like rent, staff salaries, and NEPA bills don’t wait for your customers to pay. Good cash flow ensures you can meet these obligations without stress and embarrassment. You don’t want your staff to carry your matter to Instablog or, worse, Twitter.
- Business Credibility
When you consistently pay suppliers on time, they’re more likely to give you better prices and payment terms, creating a positive cycle for your business. Many big retail businesses operate on 60-day payment cycles with their suppliers. This means they take stock and only pay after 60 days. But they can do this because of their credibility and track record.
Essential Tips for Managing Your Cash Flow
1. Keep Detailed Records
First, you need modern bookkeeping tools to track every transaction. The days of keeping records in notebooks or relying on memory are long gone. Sarah uses the Veedez app to record all sales, expenses, and payment schedules, giving her a clear picture of her liquidity at any time.
2. Set Clear Payment Terms
Be upfront about your payment policies. Sarah now requires a 70% deposit for all orders above ₦100,000 and communicates payment deadlines. This policy helped reduce payment delays and improved her cash flow significantly.
3. Monitor Your Inventory
Don’t tie up all your cash in stock. Sarah learned to track which wig styles sell fastest and now focuses her inventory on these profitable items. She does this by using Veedez to manage all her inventory. She also maintains good relationships with suppliers who deliver quickly when needed.
4. Create Cash Flow Forecasts
Predict your future cash needs. For instance, Sarah knows August to December is the peak season for wig sales due to the wedding and Christmas celebrations. She plans her inventory and cash reserves accordingly.
5. Build Cash Reserves
Always keep some money aside for emergencies or opportunities. In Nigeria’s business environment, having a financial cushion isn’t just good practice – it’s essential for survival.
6. Manage Expenses Wisely
Look for ways to reduce costs without compromising quality. Sarah negotiated better shipping rates by consolidating orders and finding local packaging suppliers to reduce costs.
7. Use Technology to Your Advantage
Embrace digital payment solutions and management tools. They help you track cash flow in real-time and make informed decisions quickly. Veedez is one tool that offers business management solutions like bookkeeping and inventory, giving you full control over your business.
Red Flags to Watch For
- More money leaving than entering your business consistently
- Unable to pay suppliers or staff on time
- Constantly needing emergency loans
- Declining cash reserves
- Too much money tied up in unsold inventory
Managing cash flow doesn’t have to be complicated. Veedez offers business owners a comprehensive solution for tracking cash flow, managing inventory, and handling payments in one place. Our bookkeeping features help you maintain clear records of all transactions, while our payment tools ensure you get paid faster.
Remember, as the saying goes, “Cash is king!” When you understand and manage your cash flow well, you’re setting your business up for long-term success.
Ready to take control of your business’s cash flow? Download Veedez today and join thousands of Nigerian entrepreneurs managing their businesses smarter. Download our app from your preferred app store to get started.