Effective Strategies for Managing Cash Flow in a Nigerian Business

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Cash flow statement

Have you been struggling to cut down on expenses but to no avail? Could it be that your cash outflow is higher than inflow, and this has been the pattern in your business? In this article, we will consider the factors affecting cash flow and effective strategies for managing cash flow in a Nigerian business.

But before we begin, let us first understand what a cash flow is. 

What is Cash Flow?

This is the net balance of cash moving in and out of a business at a given point. It is divided into three;

Financing cash flow: This is when a business receives an inflow of cash in the form of a loan, usually backed by the company’s expected inflow and outflow of money.

Operating cash flow: The total amount of cash generated by a company. A company’s operating cash flow = Total cash received from sales – Cash paid for operating expenses. 

Investing cash flow: The inflow and outflow of cash resulting from a company’s long-term investment. 

Financial Statements

  • Cash flow statements: Cash flow statement is a record that paints a picture of how a company’s operations are running, the source of its money and how it’s been spent. 
  • Cash flow quadrant: This record categorises people based on where their money comes from. e.g. employee, self-employed, business owners, or inventors.
  • Income statements: A profit and loss account that states the company’s expenses and revenue in a particular period. 

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Factors Affecting Cash Flow

This section will investigate critical factors that can affect the cash flow ratio. Understanding these factors and how to manage them effectively is crucial, as it determines a company’s growth, ability to pay bills, invest in growth opportunities and generate profit.

  1. Sales and revenue

The amount of sales and revenue a business generates directly impacts cash flow. Monitoring the sales trends and adjusting to them continually will ensure an adequate cash flow. When sales increase, the cash inflow will increase, but if the sales decrease, the cash inflow will also decrease, affecting the cash flow negatively. 

  1. Account receivable

This is the total amount of money owed by customers for goods or services that have been provided but not yet paid for (goods bought on credit). When the account receivable is on the high side, it has a negative impact on cash flow; the business in question will find it very difficult to cover expenses and may be forced to take a loan. 

A business can manage the accounts receivable by following up on overdue payments and setting clear standards for payment. Giving incentives to customers who pay on time will help boost early payments of goods and services bought or offered on credit.

  1. Account payable

This refers to the total amount of money owed by a business for goods and services received but not yet paid for. Proper management of the account payable helps to maintain a positive cash flow, maintains a good relationship with the suppliers and reduce the need for additional borrowing. 

  1. Capital expenses

These are the long-term investments made on technology, property and equipment. Although these investments are essential for growth, they have a big impact on cash flow. Therefore, it will be a significant risk to invest in assets blindly. A careful evaluation will ensure that a business makes the right call when investing. 

  1. Inventory management

Inventory, in this case, refers to goods in stock. Quality inventory management is essential for an adequate cash flow. Excess storage of inventory tiles up cash and may later lead to loss due to obsolescence (expired or outdated). Insufficient inventory leads to a lack of sales opportunities and missed revenue. A balanced management of inventories is essential for an adequate cash flow.

Understanding these factors helps businesses to generate after-tax return on assets. 

Read also: What you Need to Know About Financial Modeling as a Business Owner

Effective Strategies for Managing Cash Flow in Business

Most businesses fail due to a lack of cash, so every business owner must maintain a positive cash flow to keep their business from failing. The following tips will be of great benefit.

  1. Monitor cash flow regularly

Every business needs at least a monthly record of the cash flow (incoming/outgoing). This will ensure that shortages of cash and mistakes are easily spotted.

  1. Get customers to make payments faster

No one wants to miss out on a discount, so to get customers to pay within their credit limit effectively, try offering a discount for any who pay on time. This will not only ensure a positive cash flow but will also build a strong customer relationship.

Read also: Top 6 Payment Gateways for Nigerian Business Owners

  1. Cut down cost

Remember we talked about having a monthly record of cash flow? Using this statement, a business should carry out a cash flow analysis. This helps them to see whether any recurring expenses could be cut back or negotiate payments if possible.

  1. Get cash from unused assets

Every business needs as much cash as possible, so take a tour around your company, spot unused Assets, and sell or rent them out to get some money. 

  1. Rent equipment, don’t buy

It’s true that buying equipment gives you a sense of ownership, but is it really in your company’s best interest? Renting equipment ensures that cash is not tied up; you can also hand it back at any point or swap it with the latest model.

  1. Finance long-term contracts

Ask for at least 50% upfront before working on any contracted job. This will ensure a balanced cash flow as you will not pull too much cash from the business. And will prevent the company from total loss should there be a breach of contract. 

Read also: 10 Ways to Safeguard Your Nigerian Business From the Effects of Inflation

Conclusion

If the cash inflow in your business equals the outflow, it means the business is stagnant (not growing). If it is below, then the business is failing. So, as a business owner in Nigeria, it’s in your best interest to practice what you’ve learnt so far to ensure you have a higher inflow of cash than an outflow.

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Edited by Oluwanifemi Akintomide.

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Op-Ed are articles published by guest authors. We no longer accept guest posts. However, we are still open to adding long-term content contributors to our team of insightful writers. To write for us, please check out inisght.ng/guest-post.

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