5 Steps to Improve Cash Flow for Your Business

  • June 22, 2021

Are you struggling to maintain a positive cash flow? A cash flow refers to the money coming in and going out of your business. A positive cash flow means your liquid assets are increasing. Sometimes, maintaining a positive cash flow may be more important than maintaining a profit.

Why Is Cash Flow So Important?

Maintaining a profit and maintaining a positive cash flow are two separate things. You may be profitable, but if you don't realize that profit in liquid assets, you won't be able to pay employees, run advertisements, purchase new inventory, pay taxes on time, and so on. For example, if your profit exists from unpaid accounts receivable and you are spending more cash than what is coming in, you have a negative cash flow

Improving your cash flow requires you to think ahead. You need to forecast your expenses for each month, including taxes, inventory purchases, employee payroll expenses, etc. Then, you need to ensure you have enough cash coming in, whether from clients paying invoices, sales, or any other source of funds. An accounting advisor can simplify the process.

By maintaining a positive cash flow forecast for the coming months, you will be able to keep your business running and reinvest in its growth even during uncertain times.

If you can't seem to figure out where all your revenue is going, or if you are struggling to maintain enough liquid assets to cover your expenses, read on.

5 Steps for Improving Your Company's Cash Flow

Use these five steps to take control of your cash flow and ensure you always have enough to cover your expenses and grow your business.

1. Use a Software Tool to Track Inflow and Outflow

Cash Flow management is one of the most challenging tasks for many small businesses. A simple way to accurately forecast your cash flow is to use the receipts and disbursements method. It is very accurate for short-term cash flow forecasting.

Cash receipts are liquid assets coming into your accounts, including revenue made from sales. Cash disbursements are expenditures spent on accounts payable, inventory, raw materials, utilities, and other expenses.

You can use simple tools like Google Sheets or find a software that works best for your budget like QuickBooks, Primetric, or Float for this purpose.

2. Review your expenses quarterly

Review and reduce your expenses quarterly. Track all your business expenses and cut unnecessary expenditures. For example, switch your payroll form weekly to bi-weekly to reduce payroll processing costs. Consider ways to reduce operating costs without hurting sales and profits. For instance, review the marketing budget, and redirect money to the areas of highest impact.

An accounting advisor can help you figure out what to cut.

3. Improve Capital Management

The next step is improving your working capital management, so you always have enough cash to work with. This step involves two parts: Ensuring you are getting paid on time and managing your budget and spending.

To ensure you get more cash coming in, stop acting like a bank, minimize the clients’ payments terms, establish penalties for late payments, conduct credit checks on clients to maximize the percentage of those paying on time, and write more transparent contracts. Offer discounts for early payments. You can even slightly raise prices or set up a recurring membership option to ensure constant incoming cash flow.

Negotiate better payments terms with your suppliers and banks. While most suppliers require a 30-day terms, 60 or 90 days are sometimes available. Some banks could be willing to restructure your business loans.

4. Expect the Unexpected

The problem with the receipts and disbursements method is that it becomes harder to predict your revenue and expenses over the long run accurately. That is where this step comes into play.

Then, come up with a plan B to ensure you maintain a positive cash flow. You may set aside an emergency fund, take out a loan, seek external funding, or run massive promotional campaigns to increase sales.

5. Manage Your External Funding

External funding can temporarily increase cash flow, but it limits your flexibility. It may also increase your debts, which will decrease your cash flow in the long run. To start and grow a business without external funding is no easy task. It requires you to highly optimize your revenue and spending, so you make the most out of every penny that comes in by reinvesting it in high-converting campaigns.

If you do need outside funding, assess when and how much credit you will need, and apply in advance, when business is prospering, as it would be easier to get it on better terms. The accounting advisor should be able to provide the forecast on your capital needs.

If you are frustrated with never having access to enough liquid cash to cover your expenses, contact us for a free consultation. We'll look for the gaps in your accounting and cash flow forecasting strategies and help you get your finances in order. We provide part-time CFO, accounting, and business advisory services.