by Umar Farouk Kabir | Nov 29, 2021 | Business & Finance
Regardless of the scale of your business, how well you manage your cashflow will decide whether it ultimately succeeds or fail. Cash flow could be regarded as the blood that flows within the veins of your business.
According to a study carried out by Jessie Hagen of US Bank, cashflow is the primary reason why a business fails due to financial reasons. In fact, he estimated that a whopping 82% of the time, businesses crumble due to poor cashflow management.
The importance of knowing how to manage cashflow can’t be overemphasized, but before that, you have to understand what cashflow is and why it’s so important.
What Is Cashflow?
Cashflow can be defined as the amount of money that comes in and out of your business in a specified period of time. Your cashflow can either be positive (in the green) or negative (in the red). We’ll drop the heavy grammar and explain it in simple terms.
You have a positive cashflow when there is more money coming into your business than you have leaving it i.e. the money being earned is greater than the money being spent. While you have a negative cashflow when your business spends more than it makes within a specified period. A negative cash flow indicates there is an imbalance in the revenue stream. Bear in mind that it doesn’t necessarily equate to loss.
What Is the Difference between Cashflow and Revenue?
Cashflow and revenue should in no way be confused with one another as there is a clear difference between the two. Revenue is the amount of money that a company or business earns from the sale of products and services, while cashflow is the net amount of cash that comes into and leaves a company or business. Where revenue measures the effectiveness of a company’s sales and marketing, cashflow indicates the liquidity of a company.
Now that we have established a firm understanding of cashflow, we will see the various ways in which you can manage your cashflow.
How to Calculate Cashflow
You cannot manage your cashflow effectively without knowing how to calculate it. There are two generally accepted methods of calculating cashflow statements. They are:
Direct Method
This is a cash-based operation; what that means is that this method for calculating cashflow involves subtracting from cash sales only those operating expenses that consumed cash. For this to be successful, you need to record every cash transaction, and then deduct cashflow from the inflow. That includes items such as cash receipts, interest received, and income tax payments
Indirect Method
In this method, a technique known as accrual accounting is employed. Accrual accounting represents the liabilities and non-cash-based assets recorded over a period of time. In short, accrual accounting is defined as the entry of transactions into accounting books as they occur even without receiving payment for those goods or services.
Small scale businesses prefer this method to record cash received and cash payments as they can record transactions whenever they happen without having to wait for when they receive the cash payment.
You will have to use income statements to eliminate transactions that do not reflect cash transfers.
Methods of Managing Cashflow
1. Bookkeeping
It is next to impossible to run a smooth business operation without having a firm grip on what bookkeeping is.
Bookkeeping is the process of keeping tabs on all of your business’s financial transactions i.e. what goes in and what goes out. It lets you see exactly where your business is spending money, where your income is coming from, and also tax deductions.
This is the single most important step in managing cashflow.
2. Cashflow Statement
Cashflow Statement is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents. Generating cashflow statements can easily be done when you have an accountant. If you don’t, you can use a software or spreadsheet to generate your cashflow Statement.
Go to QuickBooks for easy cashflow statement generation and forecast
3. Analyze Your Cashflow Statement
The next step in managing your cashflow is by analyzing the cashflow statement generated by your account, spreadsheet, or software. This analysis is important because it helps you understand how money moves through your business.
A good scenario is when your revenue streams are not as effective as they should be i.e. they aren’t producing as much money as projected. Cashflow analysis will help to highlight the problem. When a business is not producing money as much as it should and it maintains the amount of money it spends, eventually it’ll end up in the red zone, a negative cashflow.
4. Credit Management
Credit management is another good measure for managing cashflow problems. When you give out credit to your clients, your cash in-flow drops because you record the credit that you give out as accounts receivable rather than as cash payments. When you sell products on credit, you normally give your clients a certain window to pay for those products. But in the meantime, your cash flow drops because you paid for the inventory with cash that is yet to receive a payment from the client(s).
5. Reduce Spending Where Necessary
When you overspend because of unnecessary expenses, it affects your positive cashflow in the sense that it reduces it. So cutting down on spending cash unnecessarily increases cash flow.
6. Shorten Accounts Receivable Window
Account receivable or AR is any amount of money owed by customers for purchases made on credit. ARs are always marked as current assets on the balance sheets.
When you, as a business owner or company, sell products on credit, depending on how long payment is due, it could affect cashflow. When the window is too wide, it will affect your cashflow negatively.
Shortening the accounts receivable window ensures you always have more cash flow as credits are paid quicker.
7. Provide Discounts on Products
One might raise an eyebrow at this, but really, it is a good way of ensuring quicker payments on products.
For instance, if your payment terms allow a 30-day window for payment after the receipt of an invoice, with at least a 2% discount if paid within the first 14 days, this will encourage quick credit settlements.
Bear in mind that you can offer more, less, or no discount for payment, depending upon your needs and your customers’ payment habits.
Conclusion
There’s a saying that “revenue is vanity, profit is sanity, cash is reality”. It is no overstatement that cashflow is indeed the lifeblood of any business. Managing cashflow is all about ascertaining when you’re going to have cash in hand, how to get more of it in your hands faster, and how to spend it wisely so as not to create cashflow problems.
Knowing how to manage your cashflow is a fundamental skill for effectively managing your business finances. Once you’re able to do this properly, the thing for you will be to grow your business to realize even greater profits.
You could also read on: Why 90% of Startups Fail and What to Do About It
by Johnson Temiloluwa | Oct 17, 2021 | Business & Finance
Doing business anywhere can be tough. But it doesn’t have to be. When you have a business plan in Nigeria, your venture can be much easier than you think. A business plan is an invaluable tool that guides your business and prepares you for future risk. This article will show you how to write a good business plan in Nigeria.
What Is a Business Plan?
A business plan, as the name implies, is a plan for a business (usually a new business) in a written document that gives a sketch, describes, and draws in detail how the business will achieve, reach, execute and accomplish its goals. It is a writing conveying information that outlines the operational and financial aims of a business. It is safe to call it “the business strategy” or “road map”. There are specific step by step guides for writing a good business plan.
Aside from the common mistake that most entrepreneurs make in their business, quite a number of businesses have started and crashed down because of a poorly written business plan or the lack of one. Having a good business plan in Nigeria will serve as a guide through every stage of your business from starting to managing and even dealing with your profits. A business plan can also be used to help you get loans from banks and get people to invest in your business. Likewise, securing grants for your business.
I know how confusing it might seem, and that’s why I’ll be sharing with you 9 easy steps to guide you in writing a business plan in Nigeria:
1. Executive Summary
Here is an important part of your business plan because this is the first part that the reader encounters. It should contain everything about your business including your mission, your objectives, business background, and keys to success. While you must cover everything on this page, be sure to keep it straight to the point.
2. Business Description Summary
In this section, you should state the nature of your business, who your target audience is, and what gives your business an advantage against the others. Be sure to define the services you offer clearly and the problems you hope to solve. Perhaps, you want to run a business of dried fruits, under this section, you’d state that you hope to solve the problem of fruit spoilage when large purchases have been made or for a long time.
This is an essential part of writing your business plan in Nigeria. It will give whoever is reading your plan a true insight into what you’re doing and if they should invest or give you a loan. If you have a location where your business is located, it should be mentioned here too. Your business description should contain all of your strengths and should be appealing to whoever reads it.
3. Product and Service Summary
You cannot write a business plan in Nigeria without in-depth details of the things your business is about.
What sort of products are you producing? What are the services you offer? Are those the only products and services you will offer? Do you intend to add more? Where do you get your raw materials from? How much does it cost you to get a full batch of production? How much profit return does your product bring back?
These are the questions the product and service summary section answer.
4. Market Analysis Summary
Before writing this, you will need to conduct a SWOT analysis. SWOT stands for Strength, Weakness, Opportunity, and Threats. This analysis will show you what other businesses are doing, what is the trend and theme related to your business, what’s its position and value in the large-scale market. It’ll help you understand who your competitors are, their strengths, what do successful competitors do? How it works.
After knowing all of that, you should include it in your plan and also, plan strategies on how you can do it better than they did. This is really an essential step in writing a business plan in this country.
5. Management Summary
Here, details of how the business or company is being run, about yourself, and partners you might have (if you are not running it alone) should be noted. How many shares do you have and how much percentage do your partners have?
In addition, include the team that runs the business and highlight their expertise and abilities. It’s safe to mention notable staff, their roles, and talents also. You should also include your plans of getting more people in the team as your business expands if you have any.
6. Strategy and Implementation Summary
In this aspect, it should contain details about how you intend to interact with your target audience – your customers. You should include your brand message, planned advertisements, and promotions that will attract people to your brand.
Furthermore, sales representatives and marketing agents, as well as methods of marketing and outreach, should be included with the strengths. In addition, it should include the advantages your business has over others and how you intend to use that to your sales advantage.
This is a crucial part of your business plan in Nigeria. It plays an important role in convincing your investors that investing will not make them suffer losses.
7. Financial Summary
Here is also an important part of your plan and should include accurate and up-to-date details of your finances. You should include cash flow statements, assets, debts if you have any. More so, the financial state of your business should also be up to date at the time of writing the plan.
You should also include how your finances are being managed, how revenue is being generated. Again, you should include who is in charge of finances, how accurate your financial predictions have been, and if you have been able to reach the goals you set out.
At a glance, your readers should be able to tell if your business is in a healthy cash position or not. If your business is just starting, be sure to include the present relevant details and avoid including false or twisted information.
8. Funding Request
There might not be a need to include this if you do not intend to ask for a loan or grant. This should contain how much you need and details on how the funds acquired would be spent. Additionally, if you are getting a loan, indicate your payment plan and if it is an investment, state the benefits that the investor would gain from their investment in your business.
You should make sure that the details you provide are accurate and detailed to clear every doubt your reader might have.
9. Appendix
Lastly, this should contain other information you may want to add including legal documents, contracts, etc.
Conclusion
Now, with your understanding on how to write a business plan in Nigeria, be sure to be straight to the point and honest with every detail you provide. If you’re still confused, you can head over to a site called bplan. There you can get different samples to practice with.
For people who have so much on their hands or can’t just find time to write a business plan themselves, just visit Mediahooch. They handle writing business and every or anything regarding branding and marketing, can be professionally executed by them.
You should also check out tips for new business owners, this will greatly help your business.
Good luck!
