Cash flow is a measurement of the money you have coming into your business from sales, and the amount going out to pay suppliers and bills.
Managing cash flow effectively ensures you have enough cash on hand to meet your obligations, while also being able to take advantage of growth opportunities.
Cash flow is the lifeblood of any business
Monitoring, analysing and optimising cash flow is essential
Managing cash flow effectively can enable you to take advantage of growth opportunities and predict when your business might face a cash shortfall
There are plenty of ways to improve cash flow, including prompt invoicing, negotiating longer payment terms, and looking for flexible finance options
Cash flow management is the process of monitoring, analysing and optimising your business’s cash inflows (money received from sales or finance) and outflows (money spent to cover expenses).
Tracking your cash flow is essential to accurately forecast your business’s cash flow needs. You need enough cash in the bank to cover due payments, but you don’t want a surplus sitting in your bank account when it could be helping your business grow. It’s all about balance.
Cash flow is your business’s lifeblood. Without it, your business can’t survive. In fact, many small businesses fail within the first year due to poor cash flow management.
If you have more money going out than coming in (known as negative cash flow), you could struggle to pay bills, salaries and other expenses, and it could be difficult to stay afloat.
Understanding how to manage cash flow can enable you to meet your financial obligations on time. It can also boost your company’s creditworthiness and attract investors. Effective cash flow management indicates financial stability and a viable investment opportunity.
Also, if you can understand patterns in your cash flow, you can predict when you might have a cash flow shortage. This enables you to take steps to prevent a financial crisis. It can help you respond quickly to market changes, too, and take advantage of growth opportunities.
The best practices for cash flow management are:
Monitoring – It’s important to track and keep detailed records of all cash coming into and going out of your business. Then you know exactly where the money has come from and where it’s being spent. Do this from the start, so you have an accurate record of your business’s financial state
Analysing – You also need to analyse key metrics such as inventory turnover, accounts payable (money your business owes) and accounts receivable (money owed to your business) to help identify areas of improvement. Comparing cash flow performance to your historical data can help identify issues early on, so you can take steps to fix them
Optimising – This involves implementing strategies to accelerate cash inflows (such as offering discounts for early invoice payments) and managing expenses by identifying cost-saving opportunities. You may also need to consider financing options to bridge short-term cash gaps
There are plenty of strategies to help manage cash flow – for example:
Getting paid quickly improves cash flow, so invoice customers promptly. Offering discounts for paying early is one way to encourage faster payments.
Automated payment methods can also make it easier for clients to pay, so you don’t waste time chasing late payments.
By delaying making your own payments to suppliers, you keep more cash in your business for longer, reducing the risk of a cash flow shortage. If you have a good relationship with suppliers, try asking for longer payment terms.
Alternatively, offer to pay in instalments, rather than at the end of a contract.
Having too much inventory can tie up your cash, but if you have too little, you could miss out on sales opportunities. Carry out regular inventory reviews, so you know exactly how much stock you have and can find the right balance.
There’s a host of accounting software to help forecast cash flow, spot patterns and make projections. This can take some of the stress out of managing your cash flow, so compare the options.
Even profitable businesses can experience cash flow problems, so ensure you have access to flexible finance options to bridge any short-term cash gaps.
For example, invoice finance enables you to borrow against your unpaid invoices. You sell those invoices to a third party in return for up to 95% of their value upfront. The third party collects payment for the invoices from the customers directly before deducting its fee and paying you the balance.
You could also consider a business credit card to enable you to borrow funds, or a short-term business loan, which you typically repay within a year.
Avoid growing the business too quickly, as this can result in cash flow shortages. Ramping up means you sell more, but you need to spend beforehand. If the time between spending more and selling more is too long, you could run into difficulties.
Finally, look at your company finances to see whether there’s anywhere you could cut back or negotiate a better deal. Perhaps you could save on your business energy bills or find a better deal on your business insurance.
However small the saving, it could make a difference and help you overcome any cash flow problems your business might face.
Rachel has spent the majority of her career writing about personal finance for leading price comparison sites and the national press, including for the Mail on Sunday, The Observer, The Spectator, the Evening Standard, Forbes UK and The Sun.