Cash flow is the lifeblood of your business. The cash flow is a measurement of the amount of cash that comes into and out of your business in a particular period of time. When you have positive cash flow, you have more cash coming into your business than you have leaving it, so you can pay your bills, and cover other expenses. When you have negative cash flow, you can’t afford to make those payments.
There are many good ways to improve cash flow for your business. There are also short-term cash flow improvement strategies that could harm your business in the long run. The best way to improve cash flow maximize your business’s profitability and your available cash at the same time. Follow these twelve steps to get a better handle on your cash flow.
1) Check your profitability
First, make sure your business is earning a reasonable profit. Even the greatest cash flow management won’t help if your fundamentals are out of whack.
2) Analyze each product and service separately to see whether it’s pulling its weight. Make sure your products are appropriately priced and work to eliminate inefficiencies. Instead of just chasing sales, chase profitable sales.
3) Do a cash flow projection
This is your early warning system for cash flow hiccups. Use an Excel spreadsheet or accounting software to plug in expected monthly cash inflows and outflows, including anticipated big-ticket purchases.
4) Finance big buys instead of draining cash
One of the most common cash flow mistakes is using cash to buy a major long-term asset, instead of getting financing. Even if you feel flush right now, you may suddenly wind up short of cash if you experience a sudden revenue shortfall or rapid growth.
5) Speed up cash inflows
Getting money into your business more quickly can save you carrying costs on your line of credit. Some tips: Send out invoices more quickly, ask customers to pay electronically and charge interest to slow-payers.
6) Monitor your cash flow regularly.
Online accounting software such as QuickBooks Online makes it simple to reconcile your accounts, generate reports, and more. Because your information is secure in the cloud, you can easily stay on top of your cash flow wherever you are.
7) Get a business line of credit before you need one.
A business line of credit is a good insurance policy against cash flow problems. You may be able to get a line of credit for a percentage of your accounts receivable or inventory if you use them as collateral.
8) Get paid faster by using mobile payment solutions.
If you sell products or provide services at customers’ homes or offices, get paid on the spot with mobile apps that use your smartphone or tablet to accept payment by credit and debit card.
9) Delay payments to your vendors.
Unless there’s a worthwhile incentive for you to pay early, figure out how late you can pay your vendors without risking late fees or harming your relationship. This keeps the cash in your account and out of your vendors until it absolutely has to be there.
10) Get business credit cards to cushion your cash flow.
Look for cards with rewards such as points you can use toward travel or business purchases. In addition to providing a cushion for lean times, business credit cards also categorize your purchases, so it’s easier to track expenses.
11) Negotiate with your vendors and customers.
Negotiation can be a powerful tool when it comes to maintaining healthy business cash flow. You can negotiate both your accounts receivable with customers and your accounts payable with vendors. For example, if a customer purchases a large order and suggests a 30- or 60-day payment term (common with large companies), ask if you can be paid sooner.
12) Compare cash-flow loans.
If you don’t have outstanding accounts receivable but want additional financing to increase your cash flow, cash-flow loans could be an option. Cash-flow loans are short-term, often high-interest loans or lines of credit offered by online lenders. You shouldn’t rely on cash-flow loans for typical expenses such as rent and payroll. Reserve them for expenses that will ultimately increase your business’s revenue, such as a marketing campaign or a new piece of equipment.
But before you apply for a cash-flow loan, a working capital loan, or any small-business loan, for that matter, compare your options based on factors including terms, APR, and what you qualify for.
Making a cash flow budget should be your first priority to get a handle on your cash flow. Your bookkeeper, accountant, accounting software, and even spreadsheets can help you anticipate inflows and outflows of money over a period of time.
Estimate your annual expenses and consider the incremental costs you will incur to implement your business strategy, in addition to the costs incurred to run your business on a day-to-day basis.
These include:
1) payroll
2) rent
3) utilities
4) interest
5) loan repayments
The cash flow statement is one of the three main financial statements that show the state of a company’s financial health. The other two important statements are the balance sheet and income statement. The balance sheet shows the assets and liabilities as well as shareholder equity at a particular date. Also known as the profit and loss statement, the income statement focuses on business income and expenses. The cash flow statement measures the cash generated or used by a company during a given period. The cash flow statement has three sections:
Cash flow from operating (CFO) indicates the amount of cash that a company brings in from its regular business activities or operations. This section includes accounts receivable, accounts payable, amortization, depreciation, and other items.
Cash flow from investing (CFI) reflects a company’s purchases and sales of capital assets. CFI reports the aggregate change in the business cash position as a result of profits and losses from investments in items like plants and equipment. These items are considered long-term investments in the business.
Cash flow from financing activities (CFF) measures the movement of cash between a firm and its owners, investors, and creditors. This report shows the net flow of funds used to run the company including debt, equity, and dividends.
A company that frequently turns to new debt or equity for cash might show positive cash flow from financing activities. However, it might be a sign that the company is not generating enough earnings. Also, as interest rates rise, debt servicing costs rise as well. It is important that investors dig deeper into the numbers because a positive cash flow might not be a good thing for a company already saddled with a large amount of debt. Conversely, if a company is repurchasing stock and issuing dividends while the company’s earnings are underperforming, it may be a warning sign. The company’s management might be attempting to prop up its stock price, keeping investors happy, but their actions may not be in the long-term best interest of the company.
Any significant changes in cash flow from financing activities should prompt investors to investigate the transactions. When analyzing a company’s cash flow statement, it is important to consider each of the various sections that contribute to the overall change in its cash position.
Make sure you take into consideration your credit policy and when your customers pay to ensure your business has enough cash throughout its business year. Budgeting allows you to see when a cash crunch is likely to occur and prepare contingencies such as getting a business loan to avoid any negative consequences for your company.
Companies pay close attention to their cash flow and seek to manage it as carefully as possible. Professionals working in finance, accounting, and financial planning & analysis (FP&A) functions at a company spend significant time evaluating the flow of funds in the business and identifying potential problems.