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How to Better Manage and Improve Your Business’s Cash Flow

Posted: 28 Oct 2019 11:11 PM PDT

By Eden Amirav

Poor cash flow management is the number one reason small businesses fail, causing 82% of business failures, according to a U.S. Bank study. How can you as a small business owner or manager mitigate this risk? How can you improve your company’s cash flow? First of all, you need to understand exactly what cash flow is (and isn't).

According to Investopedia, ''Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business." In a nutshell, it represents a business's liquidity: the cash flowing in and out.

Cash flow is not revenue or profit. One source of a business's cash flow is revenue, but there are many other sources, including, for example, the sale of business equipment. Another difference is cash flow is bidirectional in that it flows in and out and can become a negative number, while revenue is just an inflow.

Sources of business cash flow

Now that the definitions are out of the way, let's explore how you can keep your business cash flow positive—in other words, keeping your cash inflow greater than the outflow. A good start is examining the sources of a business's cash flow.

Cash from operations. This is cash generated from sales after paying off the costs of goods, any taxes due, loan interest, and all other relevant expenses. But cash from operations differs from profit or income because those measurements do not necessarily reflect cash in hand. For example, your income statement could show that your business made a profit, but if your customers don't pay on time, your business could actually run out of cash after you pay your suppliers.

Cash from investors. Any cash earned through investing falls under this category, including cash generated through the sale of business assets, e.g., equipment, property, or securities. Conversely, any cash used to buy assets, such as property and equipment, is a cash outflow. Intangible assets also fall under this category, such as cash used to purchase intellectual property or to build your brand.

Cash from finances. This includes any cash generated through a business loan or credit lines. The sale of company stock or the sale of bonds to investors also counts as cash from finances. When you pay off any debts, this is also cash outflow from financing.

Even though these are the typical cash sources, they can differ from business to business based on many factors, including business age and type of business. For example, a new business would typically generate less cash from operations and more from finances through loans or investors.

How to monitor your business cash flow

You can't improve something that you don't understand, so it's essential to monitor and measure your business's cash flow. This doesn't have to be time consuming if you use one of the many tools available, such as QuickBooks or FreshBooks. You can also hire an accountant to help you.

To monitor your business's cash flow on your own, follow these tips:

1. Look at your current available cash from the following sources:

  • Investments in your business
  • Loans
  • Your business bank account balance
  • Cash from sales
  • Cash from the sale of equipment/excess inventory
  • Any other cash generated

2. Calculate your monthly expenses:

  • Working capital
  • Rent/mortgage
  • Marketing costs
  • Salaries (including yours)
  • Inventory costs
  • Taxes owed
  • Cost of utilities
  • Loan repayments
  • Any other expenses

Aside from monitoring your cash flow, you can also make cash flow predictions, known as cash flow forecasting.

What is a cash flow forecast?

Much like you can monitor your cash flow on an ongoing basis, you can also create a cash flow forecast or projection to ensure you don't run dry. We recommend forecasting 12 months ahead. More than that may be counterproductive as there are too many unknowns and changes that can happen in a business over time.

Here's how to create a cash flow projection or forecast:

  • Create a sales forecast by predicting your expected sales per month.
  • Create a profit and loss forecast showing your daily expected spend on running costs. This then gets combined with your income to calculate profit/loss.
  • Make sure that you use your costs exclusive of VAT.
  • Include non-sales income and other costs.

[Total Cash Inflow] – [Total Monthly Expenses] = [Cash Flow Forecast]

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How to increase your business’s cash flow

Now that you have an understanding of the sources of a business's cash flow, you can think about how to increase it. Here are some tried-and-tested strategies:

Increase cash inflow

Increasing your incoming cash is an obvious, yet not standalone, tactic. Here are some tips for doing so:

  • Invoice immediately: Invoice your customers right away and determine the optimal payment terms for your cash flow strategy. You can either have a cash-on-demand business, whereby customers have to pay as they receive goods or services, or else you can have a business that provides a service and allows 30 or 60-day payments. Stick to the shortest term where possible.
  • Give discounts for early payments: Incentivize your customers to pay early or even to pay upfront. On the flip side, charge fees for late payments where possible.
  • Schedule upfront fees and payment intervals for projects: In the case of project-based work, make sure that a portion of the fees is paid upfront, and then schedule regular payment intervals to ensure the project costs don't eat into your cash flow.
  • Apply for invoice factoring: Invoice factoring is a specialized type of business funding whereby the business sells the lender its unpaid invoices, at a discount, in exchange for an upfront payment. This is a useful way to boost cash flow when your business has a problem with unpaid invoices.
  • Set up a payment collection strategy: A study by Fundbox reported that U.S. small businesses had $825 billion worth of unpaid invoices (equivalent to 5% of the U.S. GDP!). If you set up a structured and firm payment collection process, you will more likely get paid, and on time. You can start off with a soft approach through friendly email reminders (if you use a cloud-based invoicing system, you can set up automated reminders). If the customer still doesn't pay, then it's time to follow up with a phone call.
  • Offer multiple payment methods: The more payment options you offer your customers, the more likely they are to pay you. Thanks to digital payments, your customers can pay you quickly and easily. The payment option can even be linked to your digital invoicing system, so they can just click and pay.
  • Consider the subscription model: If relevant, consider offering your customers a subscription option, as this will give you regular, consistent payments at set, expected intervals. Subscriptions can work for both goods and services; for example, there are even retailers on Amazon that offer a subscription to razor blades!

Manage your cash outflow

To remain cash flow positive, you not only need to keep your expenses to a minimum but also to manage them effectively by:

  • Paying bills on time to avoid late charges or interest
  • Negotiating better payment terms with suppliers, including early payment discounts
  • Creating buffer zones in case your customers don't pay on time. For example, if your customers have a 30-day payment term, negotiate 60 days with vendors.
  • Building strong relationships with suppliers—the better your relationship with your suppliers, the more likely they are to give you payment leeway and be flexible on payment terms

Bridging the business cash flow gap

If you've done all these things but still can't manage to keep your head above water and are at risk of negative cash flow, there are other ways to increase your cash inflow:

Apply for business funding: There are many types of funding options for small businesses, including lines of credit, business loans, business credit cards, and invoice factoring.

Sell old, outdated inventory at a discount: You can sell your old inventory to your customers or sell it online to a surplus inventory company.

Sell off old, unused equipment.

Sublet office space: For example, a hairdresser can sublet a section of the salon to a nail studio or beautician.

Be proactive

The key to your business staying cash flow positive is proactivity. Don't wait until you run into cash flow problems to take action. Rather plan ahead with cash flow forecasting, monitor your cash flow continuously, and have creative strategies in place to keep your cash inflow up and your cash outflow to a minimum. Bear in mind there will likely be some surprises along the way, so ensure you have a comfortable cash cushion in place to keep your business going through the rough or unexpected patches. This is what distinguishes the successful businesses from the unsuccessful.

RELATED: The Best Ways to Finance Cash Flow Emergencies

About the Author

Post by: Eden Amirav

Eden Amirav is CEO and co-founder of Become, a technology company that helps small businesses get quick and easy access to the right funding solution. Using technology, the company optimizes each business's funding odds and matches them with customized funding solutions in the simplest way possible.The company has an ecosystem of 50+ leading lenders and fintech partners and has facilitated over $150 million in tailored business loans to date.

Company: Become
Website: www.become.co
Connect with me on Facebook, Twitter, and LinkedIn.

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