What is Business Cash Flow and How Can You Improve It?
‘Cash flow is king’ is one of those business mantras that we all repeat but never stop to question. But have you ever wondered why it’s king? Shouldn’t profit be the ultimate end goal? Read on for the answers to the cash flow questions you’ve always wanted to ask.
What Is Cash Flow?
Business cash flow is the money that goes in and out of your business. Lots of figures feed into it including accounts receivable, inventory, accounts payable, capital expenditures and finance repayments. Time is also a factor. For example, when you invoice a customer you create revenue that shows in your profit and loss. It’s only when your customer pays you that you get the cash.
Why Is Cash Flow Important?
Cash flow is one of the most important factors to keep an eye on in a small or medium-sized business. Why? Because if your cash flow isn’t healthy it could mean you won’t have the money you need to invest for growth when you want to. And in the worst-case scenario when there’s more money going out than coming in, you’ll be facing bankruptcy.
What Is the Best Way to Manage Cash Flow?
To be certain you’ve got your cash flow under control and aren’t in for any nasty surprises, you should be tracking it weekly, monthly or quarterly. Tracking cash flow will give you the visibility you need and help you project future cash flow when you’re thinking about investing to grow your business.
You can track cash flow on a spreadsheet (there are lots of handy templates online) but using cloud accounting software makes it an awful lot easier. Aside from all the other productivity benefits it gives you, you’ll also have all the figures and all the visibility you need when you need it.
How Can You Improve Cash Flow?
So you’ve started tracking cash flow and you’re getting the visibility you need. But what happens if you don’t like what you see? Here are a few ways you can improve cash flow.
- Cut costs. We’ll start with an obvious one first. Can you get better deals on your rent, your utilities or your insurance? Can you negotiate discounts with frequent suppliers? Look for areas where it’s easy to cut back or save a few pennies.
- Lease equipment instead of buying it. When you lease equipment, you don’t have to find capital to buy it. There can be tax advantages too.
- Invoice promptly. The more quickly you invoice the more quickly you’ll get paid. It may seem a bit of an administrative burden that’s tempting to put off, but it could be impacting your cash flow.
- Offer discounts for prompt payment. This can be a great way to encourage sluggish payers. Just make sure the discount makes good financial sense!
- Ask for deposits or invoice in stages. This is especially useful for large contracts or contracts that may go on for some time and will help smooth out peaks and troughs.
- Get control over your travel and expenses. A typical company spends over 10% of its annual budget on T&E, so this is a biggie. Tools such as Concur TripLink and Concur Expense help you get travel and expense spend into your system much more quickly and help you see where you could cut down or negotiate discounts.
- Don’t pay your suppliers too quickly. It will harm your relationship to pay late, but the more quickly you pay the more quickly the cash leaves your account. Make your capital work for you by finding the optimum time to pay.
- Save money. By which I mean put spare cash aside for a rainy day or future investment plans. And if you can save it somewhere that pays interest, so much the better.
Cash Flow Crunch Time
In a recent survey 81% of failed small businesses said they collapsed because of cash flow problems, which is a sobering thought. And it’s why cash flow, not profit, needs to be king in your business.
Want to learn more? Take a look at our top tips for finance on how to improve cash flow.