Cash flow difficulties can be a common challenge for many small and large business. Even a very profitable business can face extreme cash flow problems.
During my time as an accountant, credit controller, and business owner, I have learned a number of things that can improve company cash flow. In this post, I will share these items with you... (you should feel very privileged!)
What is cash flow
Cash flow is the term used to describe the amount of available cash within an entity, usually a business or company. Tight cash flow usually means that there is not sufficient available cash to meet current financial obligations. Whereas a healthy cash flow means that there is sufficient available cash to meet current financial obligations.
Why is cash flow important
In business, CASH IS KING. No matter how profitable a company may be, if there is not enough available cash, the company could cease to trade.
Cash is needed in a business for a number of reasons. These include...
- To pay for expenses and overheads
- To pay liabilities such as suppliers and bank loans
- To pay owners their share of company profits
- To invest in assets, business growth, research and development
If there is not sufficient cash within a business, it will not be able to meet it's financial obligations. This can result in a business defaulting on payments it owes and closing down.
How can cash flow be improved
There are a number of ways that an entity can improve cash flow, these are listed below...
Identity what is causing the cash flow crisis
It may sound obvious but many businesses experiencing cash flow problems don't actually know why. You cannot solve a problem without knowing what the problem is.
Creating a cash flow statement and forecast is a fantastic way to identify where cash is going and how much available cash is in the company (if any). A well created cash flow statement will show all cash in and out of the bank account(s) and pinpoint what is causing the company cash flow problems.
Sometimes the answer to solving negative cash flow isn't a single solution - the answer can involve all round improvement of all cash extracting areas of a business.
Cash Flow Statement - shows what cash has come in and gone out of the business historically. Cash flow statements typically cover a period of a few months to a few years.
Cash Flow Forecast - shows what cash will likely come in and go out of the business. The forecast is used to project all future cash transactions. Cash flow forecasts typically cover a period of a few months to a few years.
If you would like to learn how to create a cash flow forecast, you can learn for free here.
One of the most common areas to improving cash flow is to reduce debt outstanding by customers to the company (debtors). This is usually done by reducing the time it takes for debtors to pay their bills. Here are some quick tips to help improve debtor payment days...
Approve all credit - doing credit checks and approving all customer accounts before offering credit can result in less bad debts and better paying customers.
Set credit limits - setting credit limits often results in customers having to pay the business to continue trading (if the credit limit has been reached) and can avoid large bad debts. A win-win for the business.
Do credit control - chasing customers for payments is one of the best ways to get paid on time. This can include reminder customers by email, post and phone. The best credit controllers are able to build strong relationships with clients but also able to request payment.
Agree better payments terms - Agreeing payment terms is a must. Agreeing tighter payment terms can really help company cash flow.
Invoicing quicker - the quicker invoices are raised and sent to customers, the quicker you should get paid. Don't let invoices take a week to be raised, that is a week without payment!
Just as cash flow can be improved by making positive changes with debtors, cash flow improvements can also be made with creditors...
Agree better payment terms - having longer payment days with suppliers will improve company cash flow. Negotiating better payment terms is a great exercise, especially with high turnover suppliers - they want your business and could be willing to be more flexible.
Debtors vs creditors - having higher credit limits and longer payment terms with creditors compared to debtors is a recipe for success. The opposite can be a recipe for disaster.
Request higher credit limits - negotiating higher credit limits with suppliers may not be the best risk averse decision but it can be a good decision for improving cash flow health
Holding unnecessary or surplus stock/inventory is a good way to clog cash flow. Stock costs money to purchase, can be expensive to store and generates no cash for the business until it is sold. In a way, unnecessary stock freezes cash and can be a money pit.
Business planning - too many new and growing businesses do not plan sufficiently. All businesses should have a business plan, which includes projected financials, goals and expected cash needs. When businesses do not have a business plan, they can often purchase too much stock. Simply have a business plan when starting or growing a business - simple!
If you need a business plan for your business, send me an email - firstname.lastname@example.org.
If you would like learn how to create a business plan for your business, please go to my free business planning page.
Production efficiency - reviewing production, stock and storage costs is a healthy exercise for any large business. Some businesses are so serious about stock and production waste that stock and production figures are reviewed on a daily basis - I know as I use to work for a business just like this!
Some businesses have multiple loans and financing sources. Refinancing loans, mortgages and overdrafts (especially if there has been a rate cut) can help to boost positive cash flow. This is mainly due to 2 main reasons...
1. Agreeing lower interest rates and reduce finance costs, which can improve business profitability and cash flow
2. Agreeing smaller repayments may increase the length of financing and cost more interest but reducing loan repayments can be a cash flow live safer
Director salaries and shareholder dividends
This is tricky one, especially if you are an employee, but some businesses simply struggle for cash because directors and shareholders take too much cash out of the business. Just because there is a float in the bank account or an amount in retained earnings, does not mean that cash should be withdrawn. Any director or shareholder who understands cash flow will keep a decent investment in the company at all times.
Review sales and expenditure
A general review of sales and expenses is a great way to improve cash flow. Having more sales is great for any business financials. Sometimes, making more money is not the answer though. Sometimes saving more money is.
A quick warning about marketing and wages - reducing these can have a negative impact on sales, meaning that cutting these areas can be counter-productive.
Cash Flow Video
Now watch this...
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I wish you all the best. Thanks for reading!
The Bookkeeping Master
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