How External Factors Impact Business Cash Flow?

Effective cash flow management is important to achieve strategic business goals. Companies that don’t plan limited cash resources cannot survive for long.

Cash is the life blood for any business. As a business owner, you need to understand the external forces that affect the cash flow position of your company. Various factors can impact the cash flow including technology, taxes, wages, employment levels, and more.

In this blog post, we will discuss important factors that affect the cash position. The understanding of factors that affect your company’s finances will allow you to better plan the utilization of resources.

External factors – External factors – National 5 Business management Revision – BBC Bitesize

Legislation

Legislation refers to the rules and regulations enacted to protect the interest of businesses. The legislations that affect business’s cash flow position include employees rights, consumer’s rights, and customers’ rights.

Laws regarding minimum wages, intellectual property rights, health and safety are also factors that ultimately affect the cash flow position of a company.

Economy

The condition of the economy also impacts the financial position of a company. The cash flow of a company will be likely positive if the economy is in good shape with high employment levels. Keeping the cash flow positive is difficult when the economy is down.

The success of a business depends on the condition of the economy. A strong economy means that the business cash flow will be healthy resulting in accelerated growth. Any changes in the economy will have a significant impact on the profit position of a company.

Economic conditions will impact the tax rates, customer demand, and cost of financing. When the economy is in good condition, the aggregate demand for the goods and services will be robust.

An increase in tax rates and cost of financing will decrease the demand for goods and services. This will result in a negative impact on the cash flow position of a company.

Business activities depend on consumers’ income as well. Higher income levels will result in a positive impact on the business.

Social

Social factors will also have an impact on the cash flow position of the business. Social factors include the demographics of the target market. The working age of the population and level of education will impact the business.

Environment

Environment also influences the business. Pollution, weather conditions, and climate changes are the three important environmental challenges facing most businesses. The method in which a business addresses this concern will affect the cash flow position of a company.

Governments may impose an energy tax on a business. This may have a negative impact on the profit position of a company.

Competition

Competition is another external factor that impacts the financial performance of a company. A business must spend cash on building competitive advantage. It is important that the business invest in employee training, product improvement and cost-cutting capital products.

Building a reliable brand is also important for a company. The brand image will have an impact on the profitability of a company. A company with a positive brand image will be able to earn above average profits. It will result in a positive impact on the profitability of a company.

Technology

New technology can also impact the cash flow position of a business. Technological advancements can be good or bad for the profitability of a company. A business needs to be aware of the opportunities presented by technologies to improve the competitive position.

As an example, a business can optimize distribution channels using the latest logistics software solution. Optimizing the distribution channels will help in cutting operational costs and improving cash flow of the business.

With the use of technology like AI tools, IoT, cloud computing, big data analytics, a business will be able to improve its operational processes. This will allow a business to boost profit and rely on internal financing to keep a healthy cash flow.

Accounts Receivable

Accounts receivable is another external factor that impacts the cash flow position of a company. A company offers credit to customers to boost sales. But sometimes the accounts receivable can cause significant cash flow problems.

The amount unpaid means less cash inflow for the company. If the outflow is greater than the inflow, a company will face liquidity problems.

A business will rely on external financing that is costly and results in a negative impact on the cash inflow in the long run. Paying back the loan in addition to the interest charged by creditors will make it difficult for a company to survive in the long run.

Accounts receivable management is important to ensure that the company’s cash flow remains positive. It is important that a company make an effort to reduce the collection period.

Various metrics can be used to measure the impact of the accounts receivable. Some of the key metrics that can help in determining the impact on financial position include accounts receivable aging schedule, average collection period, and accounts receivable to sales ratio.

Conclusion

You must plan effectively to minimize the influence of external factors on your cash flow position. Knowing about the external factors and their impact on your business will allow you to plan ahead and minimize the negative effects.

Although you can’t control external factors that affect your company’s cash flow, you can control how you plan to minimize the negative impacts so as to preserve cash.

The strategy you adopt to address external threats can be pivotal for the success of your company. You need to research the external factors that are relevant to your business. This will help you come up with strategies to minimize the dangers and maximize the opportunities presented by external factors.

Businesses need to take measures to boost cash flow position. It is important to keep a close eye on the cash inflows and outflows. Outsourcing bookkeeping tasks is also suggested as it will help executives to focus on strategic aspects of the business.

Maxim Liberty is a reliable bookkeeping service firm. We have experienced accountants who can record financial transactions complying with the generally accepted accounting principles and standards. We use the latest accounting software to record all types of business cash inflow and outflow. For more information about our services, you can contact us by dialing (703) 957-6938.