Understanding the difference between assets and cash flow is critical to business survival. Working with an outsourced accounting department allows company executives to analyze and improve cash flow, securing the organization’s future.
Cash Is Life
The value of a company is not necessarily a measure of how financially strong it is. Recent events demonstrate how even multi-billion-dollar corporations can suffer cash flow problems. Industry leaders default on loans because their money is all tied up in non-liquid assets.
A strong cash flow allows a company to operate. It allows the organization to not only pay current expenses, but also respond to changes in the market. Sudden cost increases or, as is happening lately, drops in revenue can destroy a company without a strong positive cash flow. Now more than ever, for a business to remain viable it must improve its cash budget. Organizations working with virtual accounting departments have access to the information and expertise needed to free up needed resources.
Consumers are buying less and that drop in revenue is occurring in nearly every industry. One of the most immediate ways to maintain profitability during falling revenues is by finding ways to cut costs. In minor downturns, reducing luxury expenses or occasional costs is an effective strategy but today’s businesses need to be more aggressive.
Executives are working with outsourced accounting departments to analyze fixed expenses and find ways to save money in the long term. Companies are negotiating with vendors to strike new deals since those vendors would rather offer a reduced price than lose a lucrative client. Rents, utilities or office supply costs can be cut to improve profitability.
Another way companies are saving money is by shrinking inventories. While organizations still want to have enough stock on hand to satisfy customers, if customer traffic is down then inventory can be reduced as well.
Some business owners are cutting prices, hoping to attract new customers. However in many cases the cuts simply reduce cash flow. Other owners are trying the radical strategy of raising prices. Small price increases often have little effect on sales volume but can significantly improve profits.
Instead of cutting prices, improve customer traffic by spending more time marketing. Inexpensive promotional campaigns can bring an organization to the attention to new segments of the consumer market, bringing in additional business. Other companies are using the as an opportunity to introduce new products or services to appeal to a wider segment of the population.
No single strategy works for every business. This is why it is so important for a modern company to work closely with a outsourced accounting department. Only with a clear vision of the company’s financial situation can managers make effective decisions about the organization’s future.