Any business will find having enough cash resources available in running their business is a struggle at times, so cash flow management is important for owners to understand and manage well. How do you generate the cash needed to keep your business flowing?

The Basics

Cashflow is essentially the stream of money coming in and out of the business. You’d want more coming in while keeping cash that goes out manageable.

When more money comes in, this is called “positive cashflow”. This happens when the cash generated from sales and collection of accounts receivable etc. is greater than money coming out through expenses, salaries and payables.

On the other hand, you’ll have a “negative cashflow” when there’s much more outgoing cash than incoming. Having a negative cashflow could mean trouble for your business.

Having a stable, positive cashflow needs work, planning and proper management.

Profits is not (absolutely) equal to cash

Just because a business is “profitable”, it doesn’t automatically mean it’s generating a positive cashflow or enough cash.

Part of the profit and loss statement is called account receivables. These are interpreted as part of your profits, but they are actually unrealised. Collecting from those receivables is what generates cash. You can then use this cash to pay for new inventory, products and services. If you don’t have any inventory, you don’t have products or supplies to sell.

If you are planning to use cash for the expansion of the business, i.e. paying for new equipment in cash, that will put a strain on your cashflow. So while having cash is good, you’d have to know when to spend it and know when to make new acquisitions so as not to stress your cashflow leaving you short for business operations.

Here are some pointers in improving cash flow management.

Reduce the time it takes to deliver the product or service – set standard turnaround times, get the job done and send the invoice immediately. Using online accounting software such as Xero can help speed this up very easily.

Get Paid on Time – Invoice Tips for Small Business

Reduce the time it takes for people to pay you – First, explain your terms of trade up front. Give an estimate of the price prior to engaging. When agreed on, invoice in advance, say 25% or 50%. Finally, get tough when necessary, you’re in business to make money.

Do a cashflow forecast or a cashflow plan – understand when your business’ peak months are. That way, you can set aside money for the lean months to support you when trade is slower.

If you’re planning for expansion, make sure you have the money to cover it.

Review your finances – renegotiate your bank facilities to reduce charges or extend payment periods.

Increase sales – there are a lot of strategies out there but you should improve service standards to retain your current clients. Monitor your sales process to improve conversion rates.

Secure loans, use credit card – one solution to a pressing situation is to secure a short-term loan. Sometimes, it’s necessary to use loans in order to bolster cash reserves.

In assessing your cash situation, you need to answer two questions. Firstly, what is my cash balance as of this moment, and secondly, what do I expect my cash balance to be over the next six months?

Having proper cash flow projections allows you determine if your business is generating the right amount of cash to make it sustainable. If you’d like discuss how to improve your business’ cashflow, or have questions about improving your business in general, make an appointment with your PJT Accountants or Business Adviser.