A business must have adequate cash flow to meet its basic needs. However, imbalanced business cycles can be a major problem for businesses.
During an imbalanced cycle, certain sectors of the economy may be expanding while others are contracting, leading to uneven distribution of wealth and job opportunities. This can result in cash flow problems for businesses operating in the struggling sectors, as they may struggle to pay their bills and make ends meet.
Therefore, businesses have to figure out effective ways to ensure unrestricted cash flow throughout its operations.
Understanding Business Cycles and Cash Flow
Business cycles refer to the fluctuations in economic activity that occur over time, including periods of growth and expansion, as well as recession and contraction. Understanding the different stages of the business cycle can help businesses to anticipate and prepare for changes in the economy, and to make better decisions about how to manage their cash flow.
There are five major stages of a business cycle that can be noted in any business. These are:
- Expansion: Economic activity is growing and GDP is increasing. Businesses are expanding, employment is rising and consumers are spending more.
- Peak: GDP growth reaches its highest point before beginning to decline. This is the top of the economic cycle, and indicators such as employment, production and sales will be at their highest.
- Contraction: Economic activity is decreasing and GDP is declining. Businesses are cutting back on production, employment is falling and consumers are spending less.
- Trough: The lowest point of the cycle, at which point the economy begins to recover and a new expansion phase begins. This is the bottom of the economic cycle, and indicators such as employment, production and sales will be at their lowest.
- Recovery: The economy is recovering from the previous recession and moving towards the next expansion. This stage is characterised by a steady growth in GDP, employment, production and sales.
One of the most important aspects of understanding business cycles is recognising the impact they can have on cash flow. During times of economic expansion, businesses may experience increased sales and revenue, which can help to improve their cash flow. However, during a recession or contraction, sales may decrease and revenue may decline, leading to cash flow problems.
To mitigate the effects of these fluctuations on cash flow, businesses should have a solid cash management strategy in place. This might include keeping a sufficient cash reserve to weather difficult times, closely monitoring expenses, and implementing cost-cutting measures when necessary. It may also include seeking out alternative forms of financing, such as a line of credit, to provide a safety net during difficult times.
By recognising the different stages of the cycle and implementing effective cash management strategies, businesses can better prepare for and respond to fluctuations in the economy, and ultimately improve their chances of success.
Causes of Cash Flow Issues
There are a number of reasons why a business may struggle with cash flow issues. Some of these have been discussed below:
- Inability to Access Formal Credit
The small and micro business sector in India plays a significant role in the country’s economy, accounting for about one-third of the total GDP. Its importance in the overall economic development of the country is evident. However, due to a lack of collateral, these small businesses often struggle to access formal credit from traditional financial institutions. These institutions often view these businesses as high-risk borrowers, making it difficult for them to obtain business loans. This lack of access to funds can be a major obstacle for these businesses.
- Cash Tangled Up in Unpaid Invoices
When a business sells a product or provides a service, it issues an invoice to the customer. This invoice is a legally binding document that sets a deadline for the customer to pay the seller. Typically, customers are given 90 days to pay the outstanding balance. However, for small businesses that operate with limited resources, having cash tied up in unpaid invoices can be a major obstacle as it hinders their ability to access cash.
- Improper Growth Strategy Development
A business often has plans to expand in the future, but it’s important to identify the right time to start investing in these plans. Acting impulsively or without a proper plan to speed up growth can be harmful in the long run. Therefore, it is important to avoid common practices such as over-hiring or neglecting financial tracking, which can lead to negative consequences.
- Excessive Overhead Costs
A business has to bear additional costs that are not categorically related to sales or production. However, one must keep a tab on these expenses so that they can be minimised as much as possible
Effective Ways of Cash Flow Management
Inefficient management of cash flow can impede the growth of a business. To ensure that the business has sufficient working capital when needed, it can adopt certain strategies. These include:
– Creating a detailed budget at the start of the financial year
– Avoiding high-risk investments
– Using invoice financing
– Regularly generating and publishing cash flow statements and forecasts &
– Obtaining a line of credit.
How Razorpay Can Help Small Businesses Overcome Cash Flow Challenges?
Razorpay is a leading payment processing platform in India that has been successful in meeting the needs of growing businesses in the country. Small businesses that are in need of a temporary and immediate cash flow solution can consider signing up for the line of credit offered by this platform.
With this service, businesses can get up to Rs. 25 lakhs of credit. Businesses will only need to pay interest, starting at 1.25%, on the amount they use.
For example, if you withdraw Rs. 1 lakh at 1.5% and repay it within 20 days, you would only pay Rs. 1000 in interest.
You can also use the EMI calculator on the Razorpay website to get a rough estimate of your total payment.
Frequently Asked Questions
Q1. What are the documents needed to avail Line of Credit from Razorpay?
The required documents include:
– Bank statements
– KYC documents
Q2. What types of businesses can opt for Razorpay Line of Credit?
To qualify for this line of credit, your business must:
– Have been in operation for at least a year
– Have an annual turnover of Rs. 20 lakhs or more
Q3. What is the Annual Percentage Rate (APR) on Razorpay line of credit?
The Annual Percentage Rate (APR) on Razorpay Line of Credit ranges from 18% to 32% (approx.)